Committee of Reference final report of the Arizona Power Authority

Diana Clay O'Dell
Legislative Research Analyst
(602) 926-3745
Arizona House of Representatives
House Majority Research
MEMORANDUM
1700 West Washington
Phoerux,~ona85007
F)U((602) 417-3097
To: JOINT LEGISLATIVE AUDIT COMMITTEE
Representative Laura Knaperek, Co-Chair
Senator RobertBlendu, Co-Chair
RE: ARIZONA POWER AUTHORITY - SUNSET REVIEW
Date: December1, 2005
Attached is the final report of the sunset review of the Arizona Power Authority, which was
conducted by the House of Representatives C::Qmmerce .and the Senate Commerce and Economic
Development Committee of Reference. This report has been· distribllted to following
individuals and agencies:
Governor of the State of Arizona
The Honorable Janet Napolitano
Presidentof the Senate
Senator Ken Bennett
Speaker of the House of Representatives
Representative James.P. Weiers
House Members
Representative John McComish,Co-Chair
Representative Bill KOl'")opnicki
Representative Debbie McCun~-Davis
Representative Robert Meza
Repres~ntative Michele Reagan
Senate Members
Senator Barbara. Leff, Co-Chair
Senator Ken Cheuvront
Senator Richard Miranda
Senator Jay Tibshraeny
Senator Jim Waring
Miscellaneous
Arizona Power Authority
Office of the Auditor General
Department of Library, Archives &Public Records
Office of the Chief Clerk and Secretary of the Senate
Senate Republican Staff
Senate Research Staff
Senate Democratic Staff
House Majority Staff
House Research Staff
House Democratic Staff
COMMITTEE OF REFERENCE
Arizona House of Representatives
Committee on Commerce
Arizona State Senate
Committee on Commerce and Economic Development
FINAL REPORT
OF THE
ARIZONA POWER AUTHORITY
DECEMBER
2005
COMMITTEE OF REFERENCE REPORT
House ofRepresentatives Committee on Commerce and
Senate Committee on Commerce and Economic Development
ARIZONA POWER AUTHORITY
To: JOINT LEGISLATIVE AUDIT COMMITTEE
Representative Laura Knaperek, Co-Chair
Senator Robert Blendu, Co-Chair
Date: November 9, 2005
Pursuant to Title 41, Chapter 27, Arizona Revised Statutes, the Committee of Reference, after
perfonning a sunset review and conducting a public hearing, recommends the following:
The Arizona Power Authority be continuedfor ten years.
COMMITTEE OF REFERENCE
sentative John McComish, Co-Chair
)
..-)
.. G~/&C£I
Senator Barbara Leff, C
Z;&
~'
Senatot:iIllWari11g
RepresentativeDe bie McCune-Davis
M(rk ~Uc ee~tl<5=t-La~zb~)--
Representative Michele Reagan
COMMITTEE OF REFERENCE
House ofRepresentatives Committee on Commerce and
Senate Committee on Commerce and Economic Development
Arizona Power Authority
Final Report
I. Background
Pursuant to §41-2953, Arizona Revised Statutes, the Joint Legislative Audit Committee
(JLAC) assigned the sunset review ofthe Arizona Power Authority to the House ofRepresentatives
Commerce and the Senate Commerce and Economic Development Committee ofReference (COR).
[Attachment A]
II. Committee of Reference Sunset Review Procedure
The Committee ofReference held one public hearing on Wednesday, November 9, 2005, to
review the performance audit of the Arizona Power Authority and to receive public testimony.
[Attachment B]
At the public hearing, the Committee heard testimony from the following:
Mr. Joseph W. Mulholland, Executive Director, Arizona Power Authority
Mr. Mulholland provided a Power Point presentation outlining information regarding the
Arizona Power Authority, including the Authority's statutory responsibilities. In addition, Mr.
Mulholland summarized the internal organization and various changes that have taken place in order
for the Authority to function more effectively in the public interest.
The Arizona Power Authority was first established by the 16th Legislature, Second Special
Session in 1944. The original enabling legislation in Title 30, Chapter 1, Arizona Revised Statutes,
outlined the organization, powers and duties ofthe Authority. The stated purpose ofthe Authority
"is to bargain for, take and receive electrical or other forms ofenergy and make these forms of
energy available for the benefit ofthis state.}} Specifically, the Authority's responsibility included
acquiring and marketing the state's allocated share of Hoover Dam (formerly Boulder Dam)
hydroelectric power developed from the waters ofthe main stream ofthe Colorado River. Hoover
Power Plant at Hoover Dam serves as the primary source ofpower and energy for the Authority and
is located about 25 miles from Las Vegas, Nevada.
Additionally, the Legislature enacted Laws 1967, Chapter 10, Arizona Revised Statutes,
which created the Arizona State Water and Power Plan to provide a financing mechanism for the
Central Arizona Project (CAP) through the Authority; however, the project was ultimately
constructed by the federal government. The legislation enabled the construction of several
hydroelectric facilities and later authorized the financing and construction ofArizona's portion ofthe
Hoover Uprating Project at Hoover Dam.
A five-member Arizona Power Authority Commission appointed by the governor and
confirmed by the Senate oversees the Authority. The Authority serves low-cost and dependable
hydroelectric power to Arizona irrigation and electrical districts, cities, and towns. Salt River Project
is one ofthe largest customers next to the Central Arizona Water Conservation District, which is the
operating agent for CAP. Revenue is derived from the sale ofhydroelectric power and transmission
service to more than 30 wholesalers. Using its financing capabilities authorized by the State Water
and Power Plan, the Authority issued tax exempt revenue bonds in excess of$90 million to fund the
Hoover Uprating Project. Approximately $57.5 million remains unpaid.
Laws 1996, Chapter 10, permits the termination ofthe Arizona Power Authority only ifthere
are no outstanding contractual obligations, debts, or other financial obligations related to the Hoover
Power Plant Modifications or Hoover Power Plan Uprating Project.
III. Committee Recommendations
The Committee of Reference recommends the Arizona Power Authority be continued ten
years.
IV. Statutory Report Pursuant to Section 41-2954, Arizona Revised Statutes
[Attachment C]
V. Attachments
A. Meeting Notice
B. Minutes of Committee of Reference Hearing
C. Report by Arizona Power Authority
- Final Report
Page2
Attachment A
Interim agendas can be obtained via the Internet at http://www.azleg.state.az.usllnterimCommittees.asp
ARIZONA STATE LEGISLATURE
INTERIM MEETING NOTICE
OPEN TO THE PUBLIC
SENATE COMMERCE AND ECONOMIC DEVELOPMENT AND HOUSE OF
REPRESENTATIVES COMMERCE COMMITTEE OF REFERENCE
FOR THE SUNSET REVIEW OF:
INDUSTRIAL COMMISSION OF ARIZONA,
BOILER ADVISORY BOARD
EMPLOYMENT ADVISORY COUNCIL
OCCUPATIONAL SAFETY AND HEALTH ADVISORY COMMITTEE
OCCUPATIONAL SAFETY AND HEALTH REVIEW BOARD
ARIZONA STATE BOARD OF TECHNICAL REGISTRATION
ARIZONA POWER AUTHORITY
Date:
Time:
Place:
Wednesday, November 9, 2005
8:30 a.m.
House Hearing Room 3
AGENDA
1. Call to Order
2. Opening Remarks
3. Presentation of Performance Audits:
Larry Etchechury, Executive Director, Industrial Commission of Arizona
• Industrial Commission of Arizona
• Boiler Advisory Board
• Employment Advisory Council
• Occupational Safety and Health Advisory Committee
Diana Clay O'Dell, Research Analyst, House Committee on Commerce
• Occupational Safety and Health Review Board
4. Public Testimony
5. Discussion
6. Recommendations by the Committee of Reference
7. Presentation of Performance Audit
Ronald W. Dalrymple, Executive Director, Board of Technical Registration
• Arizona State Board of Technical Registration
8. Public Testimony
9. Discussion
10. Recommendations by the Committee of Reference
11. Presentation of Performance Audit
Joseph W. Mulholland, Executive Director, Arizona Power Authority
• Arizona Power Authority
12. Public Testimony
13. Discussion
14. Recommendations by the Committee of Reference
15. Adjourn
Members:
Senator Barbara Leff, Co-Chair
Senator Ken Cheuvront
Senator Richard Miranda
Senator Jay Tibshraeny
Senator Jim Waring
10/24/05
jmb
Representative John McComish, Co-Chair
Representative Bill Konopnicki
Representative Debbie McCune Davis
Representative Robert Meza
Representative Michele Reagan
People with disabilities may request reasonable accommodations such as interpreters, alternative
formats, or assistance with physical accessibility. If you require accommodations, please contact the
Chief Clerk's Office at (602) 926-3032, TOO (602) 926-3241.
Attachment B
ARIZONA STATE LEGISLATURE
Forty-seventh Legislature - First Regular Session
SENATE COMMERCE AND ECONOMIC DEVELOPMENT AND HOUSE OF
REPRESENTATIVES COMMERCE COMMITTEE OF REFERENCE
FOR THE SUNSET REVIEW OF
INDUSTRIAL COMMISSION OF ARIZONA
BOILER ADVISORY BOARD
EMPLOYMENT ADVISORY COUNCIL
OCCUPATIONAL SAFETY AND HEALTH ADVISORY COMMITTEE
OCCUPATIONAL SAFETY AND HEALTH REVIEW BOARD
ARIZONA STATE BOARD OF TECHNICAL REGISTRATION
ARIZONA POWER AUTHORITY
Minutes of Meeting
VVednesday,~ovember9,2005
House Hearing Room 3 -- 8:30 a.m.
Chairman McComish called the meeting to order at 8:40 a.m. and roll call was taken by the
secretary.
Members Present
Senator Cheuvront
Senator Tibshraeny
Senator VVaring
Senator Leff, Cochair
Senator Miranda
Members Absent
Speakers Present
Representative Konopnicki
Representative McCune Davis
Representative Meza
Representative Reagan
Representative McComish, Cochair
Larry Etchechury, Director, Industrial Commission of Arizona
Laura McGrory, Chief Counsel, Industrial Commission of Arizona
Diana Clay O'Dell, House Majority Research Analyst, Commerce Committee
Willie Johnson, representing self
Ronald Dalrymple, Executive Director, Arizona State Board of Technical Registration
Canan D'Avela, representing self
Joseph Mulholland, Executive Director, Arizona Power Authority
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
OF THE INDUSTRIAL COMMISSION OF ARIZONA, ETC.
November 9, 2005
Industrial Commission of Arizona
Larry Etchechury, Director, Industrial Commission of Arizona (lCA), said he believes the ICA is
efficient and effective in fulfilling its statutory responsibilities. The ICA was established in 1925
to implement the constitutional provisions creating the worker's compensation system in
Arizona. The duties of the agency have been expanded over time to include occupational safety
and health issues, regulation of child labor, resolution of wage disputes, vocational rehabilitation
for injured workers, and other activities. The ICA has 313 employees, an operating budget of
approximately $17.7 million, and is funded by a three percent tax on worker's compensation
premiums. The policy-setting body is a five-member commission appointed by the Governor
and confirmed by the Senate. The members serve five-year staggered terms.
Mr. Etchechury related that the agency has four major focuses, three of which are regulatory in
nature, and the fourth is almost an insurance function. He reviewed the responsibilities of the
Claims Division and the Administrative Law Judge (ALl) Division, noting that the average time
to adjudicate a case in 2005 was 118 days. There is a significant amount of concern that the time
frame should be less. Trying to accommodate the schedules of physicians, in particular, to make
live testimony is extremely difficult, and in some cases, may not be necessary, so the agency is
working with the attorney community about being more selective as to when and where a
doctor's testimony is needed as opposed to written reports. He provided an overview of the
Arizona Division of Occupational Safety and Health (ADOSH), which involves the Compliance
Program, the Consultation/Training Program and the Boiler and Elevator Programs (Evaluation
Report from the U.S. Department of Labor from October 1, 2003 through September 30, 2004,
Attachment 1).
He related that the Commission has an Occupational Safety and Health Advisory Committee, an
Elevator Advisory Board, a Boiler Advisory Board, and an Employment Advisory Committee,
which are typically composed of industry representatives, both labor and management, to assist
in adopting standards. The Occupational Safety and Health Advisory Committee is appointed by
the ICA, and in addition to assisting in adoption of standards, provides input to the Governor's
Office for appointments to the Occupational Safety and Health Administration (OSHA) Review
Board. The Committee can also be used in other areas. For example, several years ago, fatalities
occurred involving excavations, so the Occupational Safety and Health Advisory Committee
helped develop a comprehensive program that eradicated fatalities for about a five-year period.
Mr. Etchechury reviewed the responsibilities of the Labor Department in relation to wage
disputes, youth employment laws, licensing of employee paid employment agencies, and the
Employment Advisory Council whose members are appointed by the ICA for three-year terms.
The Employment Advisory Council reviews new or existing licensees and advises the ICA on
matters involving employment agencies. A number of years ago a request was made to the
Legislature to delete this function from the ICA's jurisdiction, but the industry testified as to the
benefits of the Council as a regulated element. In reviewing jurisdictions in other states, much
fraud was found, particularly in career counseling and some employment agencies, so the
Legislature decided to retain the Council as part of the jurisdiction of the ICA, which has
prevented fraud from occurring in Arizona.
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
OF THE INDUSTRIAL COMMISSION OF ARIZONA, ETC.
2 November 9, 2005
Mr. Etchechury said the fifth function is the Special Fund, which consists of about $280 million,
to provide insurance for uninsured claimants and continue worker's compensation benefits for
claimants of insolvent carriers and insolvent self-insured employers. In 2001, the Special Fund
had an $80 million surplus, but now there is a $190 million deficit because about 16 insurance
companies became insolvent from 2001 to 2005. Last year, the Legislature provided the
authority to revert excess monies from the Administrative Fund to the Special Fund at the end of
the year, which provided a cushion to meet annualized expenses; however, it is not known how
much insolvency may occur in the future. He noted that the Arizona Department of Insurance
(DOl) has deposits on file for insurance carriers regarding liabilities, but those deposits are not
sufficient; however, if the deposits were not on file, as in most states, the deficit would be much
larger. The ICA is working with DOl on that issue. He added that the Special Fund also shares
the responsibility with insurance carriers or self-insured employers for a portion of liabilities for
certain loss of earning capacity awards, provides vocational rehabilitation benefits, and provides
continuing medical benefits for pre-1973 worker's compensation claims. (For more details see
Attachment 2).
He advised Senator Leff that the Special Fund is funded by a 2.5 percent assessment against
employers, which is the maximum amount and became effective in 2004. He indicated that he
does not desire to increase the assessment.
Mrs. McCune Davis asked if the insolvencies are a backlash to what happened in California.
. Mr. Etchechury responded that a few elements took place. In the early 1990s, everyone
recognized that all kinds of money could be made in the market. Insurance carriers marketed to
get business and let down some protections. Suddenly, the market began tightening up and
reversals started to take place. At that point, people were in the system that were at much larger
risk and not paying those risks. For example, Reliance Insurance Company reported three
quarters of a billion dollar loss in the third quarter of operations, and at the same time, asked DOl
for a deviation from the insurance rates.
He advised Senator Leff that the penalty for a company that does not carry workmen's
compensation insurance ranges from $1,000 to $10,000, and depending upon the repetitiveness,
the ICA can go to Superior Court and obtain an injunction to keep the company from operating.
Collecting the money is difficult because many times companies declare bankruptcy and go
through the federal bankruptcy process, which is extremely difficult and onerous. The collection
rate is about 20 percent. If the ICA finds that a company declared bankruptcy and has not paid
the penalty, the injunctive process is used whereby a superior court judge rules that the company
cannot operate or the owner will be sent to jail. Unfortunately, some companies are probably
still in operation that the ICA is not aware of because when bankruptcy is declared, the owner
can change the name of the company and start again.
When Mr. Konopnicki asked for further details about the increase in insolvencies,
Mr. Etchechury related that from 1970 to 2001 the Special Fund had about 350 open claims.
From 2001 to the present there are in excess of 1,200 open claims. When an insurance carrier
obtains a license, financial reports are filed with DOl, and based on those reports, a deposit is
made with DOl that is supposed to be sufficient to cover potential liabilities. In reality, the
deposits were not adequate by about 50 percent.
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
OF THE INDUSTRIAL COMMISSION OF ARIZONA, ETC.
3 November 9, 2005
Mr. Etchechury explained that as an example, the domicile insurance carrier in California knew
the Freemont Insurance Company was in trouble long before bankruptcy was declared, so the
company was under a restitution process to resolve problems. In the process, their companies
were consolidated into one company, and DOl had deposits for each of the companies. The
domiciliary said any assets associated with the companies must be given to the domiciliary for
that one company. DOl must have good reason to keep the deposits and did not because the
outcome is not known, so the domiciliary can legally do that. The ICA then calculated what the
deposit would be for the one company, which, in reality, would be the same, but in this particular
case, it was not, so there was a major hit to the Special Fund. Other elements were also
involved, but he was told that DOl did everything possible to sustain the deposits.
Mr. Konopnicki said he would like the name of the person involved from DOL
Laura McGrory, Chief Counsel, Industrial Commission of Arizona, agreed that carriers are
required to make a deposit with DOL Carriers file an annual financial statement with DOl on an
annual basis and fill out a form regarding prior losses, premiums written, and reinsurance credits.
There is a present value discount, but the formula calculates a number that becomes the statutory
deposit. The statute says what is required to be posted, so if the number is lower according to the
formula, DOl may be required to return some deposit money to align with the formula. In the
Freeman scenario, a merger occurred and the companies, which mayor may not have been in
conjunction with the domiciliary because they were in some type of receivership, indicated to
DOl that they came up with a lower number so DOl was holding excess deposit money that
should be returned. An enormous amount of dialogue went on between DOl and California, but
ultimately, the deposit money was returned. There were some difficulties afterward with the
nature of the security DOl accepted, which essentially declined in value. It was some type of
Fannie Mae mortgage-based security, so the Special Fund is left with a deficiency as the
liabilities are higher than the deposit.
Senator Leff submitted that the deposit then is meaningless. Ms. McGrory answered that when
an insurance company sees the writing on the wall, an attempt is made to marshal assets in order
to have as much money as possible to facilitate the process of drawing things down, so DOl
frequently receives requests for release of deposit money. When DOl knows a company is in
trouble, everything possible is done to hold on to the money. There is a current situation in
which an insurance carrier is headed for insolvency and the carrier and domiciliary are asking for
money to help the company. DOl has worked hard to retain the deposit by having an actuarial
analysis to justify the numbers. Because of what happened in the past, more dialogue goes on
between DOl and the ICA. DOl no longer releases deposit money without asking the ICA if
there is a problem.
Senator Leff then questioned the purpose of the deposit. Ms. McGrory agreed that is a concern,
noting that the ICA is reviewing ways to strengthen the ability to keep deposit money or increase
the deposits. Multiple things are occurring with credits for reinsurance and a present value
discount of six percent, so elements are decreasing the deposit.
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
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4 November 9,2005
Senator Leff asked if credit for reinsurance goes away since the money is supposed to be there to
reinsure the money. Ms. McGrory replied that the benefits of reinsurance are not necessarily
realized when a carrier goes into liquidation because reinsurance deposits are considered an asset
of the estate. Although the deposit decreases because of the credit for reinsurance, the liquidator
marshals the reinsurance proceeds, and to the extent the proceeds are recovered,· a pro-rata
distribution is made amongst creditors, so there is not a dollar-for-dollar benefit from the
reinsurance posting.
Senator Leff noted that good employers are paying the maximum 2.5 percent assessment, partly
because of this and wondered why the employer community is not upset about what the
reinsurance community is doing. Mr. Etchechury responded that the lCA supported legislation
dealing with different elements, but even though the employer community was aware, there was
no involvement on their part.
Mr. Konopnicki said as an employer in Arizona he did not know about the situation, which is a
major problem. He recommended referring the matter to the Attorney General. Mr. Etchechury
indicated that employer representative organizations, such as the Chamber of Commerce, the
National Federation ofIndependent Business and others, were made aware, but he does not know
what was done with the information. He submitted that it is easy to say all that has to be done is
change the formula and make sure deposits are adequate; however, if that were done right now,
there may be insurance companies on the brink of disaster, so asking for an increase in deposits
by 50 percent could potentially create additional insolvencies.
Senator Leff suggested retaining the amount rather than increasing the deposit. Mr. Etchechury
responded that would not entirely solve the problem. What happened with the Freemont
Insurance Company is one particular situation, but there are other companies like Reliance
Insurance Company where the deposit was inadequate. Multiple issues created the problem,
such as large deductibles. For example, an employer may want a large deductible policy for
$1 million and the premium is calculated accordingly. When the deposit is calculated, the
$1 million is not considered in terms of liability, which would be counted beyond the $1 million.
Therefore, when the whole house of cards goes down there is the potential not only for liability
of the insurance, but also, the large deductible employer. An entity has been created that is not
even addressed in statute. A number of large deductible employers currently not identified are
acting as self-insured employers with no oversight whatsoever in terms of processing claims,
which was created with the insolvency debacle. He said the agency is becoming involved in
insurance law when it previously was not.
Mrs. McCune Davis asked if DOl and the lCA are notified when a company is going into
receivership and questioned if tools are in place to freeze deposits. She wondered if action is
being taken or legislation is needed to protect existing assets. Mr. Etchechury replied that
legislation was introduced to codify insolvency processes at DOl that were normally accepted,
but were challenged by others not necessarily involved in the process. That has helped, but there
is more to be done. The agency is working closely with DOl to address some issues, but it is
very complex.
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5 November 9, 2005
Senator Leff remarked that she understands the deficit is over the lifetime payment and
wondered if the fund can be brought back into balance. Mr. Etchechury said he hopes so,
without affecting the principle in terms of existing investments. ICA is able to meet annualized
expenditures. In the long term, he hopes to resolve the issue so this does not reoccur, but the
number of potential insolvencies is not known.
Senator Leff commented that is why it was so important to some legislators not to privatize the
State Compensation Fund, which probably would have been severely diminished.
Mr. Etchechury acknowledged that the State Compensation Fund is a key element of the
worker's compensation system.
Mr. Konopnicki contended that major problems exist, not of the ICA's making, but due to
legislation and DOl. It is the responsibility of the Committee to offer legislation to solve these
problems, but he is hesitant to recommend a IO-year extension of the agency. Senator Leff
submitted that legislation should be introduced to address the problems, but there is no reason
not to extend the agency for 10 years.
Mr. Etchechury related to Chairman McComish that funding from the three percent tax paid by
employers is adequate. Currently, 2.5 percent is used to fund the agency and the additional one­half
percent is administrative money that goes into the Special Fund to meet annualized
expenditures. If the Special Fund becomes fiscally sound, the rate can only be sufficient to fund
the agency, so it is a floating rate on the administrative side, and any extra goes into the Special
Fund.
Chairman McComish asked if employer paid agencies are licensed. Mr. Etchechury replied that
those were taken out of the statute several years ago and are no longer licensed. There have not
been any problems associated with employer paid agencies because the market dictates;
therefore, he does not believe regulation is necessary.
Mrs. McCune Davis noted that fines charged to employers as the result of accidents that occur in
the workplace go into the General Fund and questioned if adequate money is available for safety
programs or some of that money should be directed for that purpose. Mr. Etchechury responded
that the question arises periodically in the Legislature. The money could be used to enhance
safety and health programs, but it is up to the Legislature. There have been some efforts,
including providing bilingual health and safety training programs.
Diana Clay O'Dell, House Majority Research Analyst, Commerce Committee, advised that the
purpose of the OSHA Review Board is to hear administrative appeals regarding orders of the
Industrial Commission's Arizona Division of Occupational Safety and Health (ADOSH). This
forum provides a final appeals step in the administrative law process before filing with the Court
of Appeals. The OSHA Review Board consists of five members appointed by the Governor to
five-year terms. Current law mandates one representative of management, one of labor and three
public members. The OSHA Review Board operates with only a contract employee who is an
attorney. Following discussions with the Governor's Regulatory Review Council (GRRC) prior
to the OSHA Review Board's routine five-year rule-making process, the OSHA Review Board
discovered that it does not have the statutory rule-making authority necessary to adopt rules;
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
OF THE INDUSTRIAL COMMISSION OF ARIZONA, ETC.
6 November 9, 2005
therefore, the rule-making authority will be sought through future ICA legislation. The OSHA
Review Board historically meets every quarter; however, since more cases are now mediated
before going to a formal hearing, only one meeting was held in the past two years. A meeting
will be held on November 30, 2005.
Chairman McComish related that Lisa Gervase, the contract attorney for the OSHA Review
Board, could not attend the meeting (for more details about the OSHA Review Board, see Letter
from Ms. Gervase, Attachment 3).
Senator Leff questioned why the Board has separate review authority. Ms. O'Dell responded
that ALJs under the authority of the ICA make the initial decision, so these are appeals to a
separate independent review board to avoid a conflict of interest.
Senator Leff stated that in working with the Registrar of Contractors a constituent was heard by a
second judge for an appeal, not an ALI. Mr. Etchechury replied that the OSHA Review Board
was created to mirror the appeals process at the federal level through an OSHA Review Board
that is totally separate from the U.S. Department of Labor. During creation of the OSHA
Review Board on a local level, the Legislature and Governor's Office wanted a mechanism
whereby an employer could go before a lay board without incurring the expense of hiring an
attorney. An rCA ALJ makes the initial determination, which can be appealed to the OSHA
Review Board, then the Court of Appeals and Supreme Court. He understands the Registrar of
Contractors uses the hearing division set up by the Legislature as part of the appeals mechanism,
but he is not sure if the Registrar of Contractors can overrule that decision.
Senator Leff said the Registrar of Contractors can overrule the decision, so the constituent went
back for another hearing. Mr. Etchechury indicated that the ICA does not have that. The appeals
process should be separate from the ICA because a determination is already made at a divisional
level in terms of ADOSH and an ALJ, so this is a separate appeals process that should be
separate.
Chairman McComish said it sounds like ICA does a good job providing mediation, so perhaps
there is less need for the OSHA Review Board today then when it was created. Mr. Etchechury
responded that is possible as the number of cases heard is minimal, i.e., one case in the last two
years and one case is currently pending. The Review Board is funded from a non-reverting
General Fund account. This means there is a certain amount of funding, but no appropriation for
the next two years, so expenditures for the contract attorney will only be with respect to that one
case and will not be monumental. He indicated to Senator Leff that he believes the
OSHA Review Board should be continued.
Ms. O'Dell advised Senator Leff that the procedural rule in place related to what needs to be
done to file paperwork. When the agency was told there is no specific statutory authority for
rule-making, the decision was made to allow the procedure to repeal, seek statutory authority,
and reinstate the rule.
Willie Johnson, representing self, testified that his son, Daryl Wayne Johnson, was killed on
October 28, 2003 while working in the warehouse at Accurate Cargo Delivery when the forklift
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
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7 November 9, 2005
he was operating fell on top of him crushing his chest. While Mr. Johnson was in the emergency
room of St. Joseph's Hospital, no one from the company arrived to console the family or check
on his son's condition. During the field investigation that same day by the investigator from
OSHA, the owner was only concerned about the possibility of being sued. The OSHA
investigator interviewed a few employees, one of which indicated that the owner brags about
making $250,000 per year, but cannot provide safety training for employees.
Mr. Johnson stated that another accident involving a forklift occurred on January 2002 that was
not reported to OSHA, but the individual involved wrote a sworn document to OSHA concerning
the incident. The individual indicated that no forklift training was ever provided and his
supervisor told him to drive the forklift faster. About an hour after the incident occurred, the
owner and general manager showed up and asked the individual if he was okay. The individual
said he was, so the owner and general manager left, but the individual was not told to go to the
emergency room to be checked. The person stated in the report that the company does not
believe in safety, hires young inexperienced warehouse men, and pays the workers a low salary.
Mr. Johnson stated that while going through the procedure with OSHA and State Compensation,
he tried to obtain a professional opinion on how to hold the owner accountable. He was advised
by counsel that the ICA covers that and there is nothing that can be done. Many employees who
worked for the company told him the company does not care about employee safety. He gave
the information to OSHA, and as time went on, found that several violations were issued to the
company totaling $35,000. He personally thought some incidents should have been willful, but
OSHA did not. The penalty was eventually reduced to $21,000 because the company agreed to
pay, but he does not know if the penalty was paid. He recommended that any time a hearing is
held to negotiate a settlement offer or plea agreement for a company that is negligent resulting in
a serious injury or loss of life, the family should be allowed to attend hearings and voice opinions
instead of being shut out. He would also like to see the procedures changed so fines are levied
without reductions.
Mrs. McCune Davis conveyed that she asked Mr. Johnson to testify. She expressed concern that
sometimes it is more expeditious for employers not to follow safety rules, and unless fines are at
an appropriate rate, some employers would rather pay the fines and not follow safety rules. This
young man with a promising future is the reason the rules were implemented. She added that she
attended a press conference the day before on the west side about two young men killed at a
Subway facility. The employer was present and paid for the funerals, which is quite a contrast.
Senator Leff asked if a company can be shut down or something for negligence as opposed to a
monetary penalty. Mr. Etchechury replied that in this particular case, an investigator looked at
every allegation that was made and found serious violations. For willful or repeat violations
where it appears there are egregious elements, cases can be referred to the Attorney General's
Office for prosecution.
Senator Leff noted that someone was harmed at Accurate Cargo Delivery in a similar accident
and wondered why that was not considered. Mr. Etchechury said in that incident the forklift
operator was backing out of a semi onto the loading dock. The driver of the semi did not realize
someone was in the truck and drove away from the dock, so the forklift fell off the truck down
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below the dock. The circumstances were different. Violations were found and the employer did
not have an effective safety and health program or the citations would not have been issued.
There is typically a 25 percent reduction in the penalty to expedite the settlement process and
close the citation. He pointed out that Arizona statute allows a $25,000 penalty to be paid by the
employer to the family (widow and any individuals solely dependent upon the person injured),
which the Committee may want to extend or expand to cover serious violations.
Mr. Etchechury indicated to Senator Waring that a willful violation occurred in Yuma where
individuals were prosecuted. Employees were entering a sewer system. The company had been
instructed on provisions to follow to make sure the air was clean and breathable, but did not
follow-up, and two individuals died. The case was referred to the Attorney General's Office
where criminal negligence was found on the part of the employer. In another situation, a student
attending the University of Arizona on a wrestling scholarship was working for the summer for a
contractor on an excavation. An Arizona Public Service employee working in an adjacent area
told the foreman that people cannot go into the cut without adequate protection and shoring in
place. "The contractor continued to work and the excavation caved in killing the individual. That
was considered a willful violation so there was a criminal indictment. He clarified that if there is
a follow-up investigation and the safety rules were ignored by supervision, even though no injury
occurred, it would be considered a willful violation and a fine of $70,000 would be assessed.
Ms. Reagan asked if there is some type of follow-up on violations. Mr. Etchechury responded
that every serious violation is followed up through periodic visits, which is required by statute.
Prosecution" of cases only occurs for willful and repeat violations, not serious violations, which
could be included.
He advised Senator Leff that violations were issued to Accurate Cargo Delivery because of lack
of safety training, speeding and no supervision on the part of the employer to prohibit speeding,
propane canisters on the vehicle were not adequately secured, and the seat belt issue.
Senator Leff moved that the Committee of Reference recommend to the
Legislature that the Industrial Commission be continued for 10 years. The
motion carried by a roll call vote of 9-0-0-1 (Attachment 4).
Senator Leff moved that the Committee of Reference recommend to the
Legislature that the Boiler Advisory Board be continued for 10 years. The
motion carried by a roll call vote of 9-0-0-1 (Attachment 5).
Senator Leff moved that the Committee of Reference recommend to the
Legislature that the Employment Advisory Council be continued for
10 years. The motion carried by a roll call vote of 9-0-0-1 (Attachment 6).
Senator Leff moved that the Committee of Reference recommend to the
Legislature that the Occupational Safety and Health Advisory Committee be
continued for 10 years. The motion carried by a roll call vote of 9-0-0-1
(Attachment 7).
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Senator Leff moved that the Committee of Reference recommend to the
Legislature. that the Occupational Safety and Health Review Board be
continued for 10 years. The motion carried by a roll call vote of 9-0-0-1
(Attachment 8).
Arizona State Board of Technical Registration
Ronald Dalrymple, Executive Director, Arizona State Board of Technical Registration, said the
Board regulates nine different practices. As of this week, there are 21,895 licensees ranging
from engineers (60 percent of the registered population), architects (23 percent), land surveyors
(8 percent), landscape architects (2 percent), geologists (3 percent), home inspectors (4 percent),
certified drug laboratory site remediation supervisors and workers (1.2 percent) and assayers
(1/10 of 1 percent) (For more details, see Attachments 9 and 10).
He infonned the Members that the Arizona Department of Environmental Quality (ADEQ)
recently repealed the rule covering the Certified Remediation Specialist Program that was
developed in 2001 by ADEQ as part of the Greenfields Program, which created a new category
of registration for certified remediation specialists. Ten people are in the program and the rule
goes into effect in 2008, so perhaps the Legislature should consider modifying the Board's
statutes to eliminate regulation of certified remediation specialists. He indicated to Senator Leff
that he agrees with ADEQ. It is an ADEQ program, and apparently, during the four years of
existence there has not been a project where a certified remediation specialist was used.
Mr. Dalrymple reported that there are 32 registered assayers in the state and Arizona is the only
state that regulates the profession. The assayer examination needs to be revised, which would
probably cost about $30,000. Every time a sunset occurs by the Auditor General's Office, the
question arises as to whether the agency should continue to regulate assayers. He predicted some
problems if the regulation continues because the agency is trying to develop programs that are
self-sufficient, since there is such a diverse group of professions, so if one is taken out of the
loop there is no negative impact on the agency or others. He advised Senator Leff that assayers
were originally regulated primarily because of mining activity in Arizona.
Referring to Page 6 of the handout (Attachment 9), Chairman McComish noted that the number
of days for complaint resolution increased in the last few years. Mr. Dalrymple responded that
investigators make between $28,000 and $30,000 per year, and in the main investigative body
there are five investigators, including the manager. The agency generally ends up hiring
younger, less experienced investigators or older retired police officers or other individuals. After
receiving training and having two or three years of experience, the younger people leave for
larger agencies with more money in the budget for investigative salaries. The more experienced
investigators move after a short period of time to the Arizona Department of Corrections, the
Department of Racing, etc., since many are former police officers and find the work dull. The
only investigator with a lot of experience is the manager with 15 years, and the next is three
years. Because of training time to bring new investigators up to speed, the work falls behind.
Mr. Dalrymple indicated to Chairman McComish that he would like more money for
investigators so employees' can be retained. The number of investigators is sufficient and the
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workload can be handled once the investigators get up to speed. Investigations take about
25 hours, but two investigators are currently being trained by the investigation supervisor.
Mr. Dalrymple advised Senator Leff that the Board is a 90-10 agency and self-supporting.
Sufficient money is provided from fees, but the Legislature is keeping more than 10 percent,
which happens with many 90-10 agencies. He advised Chairman McComish that the Board has
19 authorized FTEs and 18 are filled, but one is being interviewed this week. Turnover in the
agency is 34 percent. He clarified that the 10 certified remediation specialists are licensed
engineers, geologists or chemists, so those individuals would continue their present jobs and
would not be impacted by eliminating the regulation.
Canan D'Avela, representing self, revealed that he is one of the few registered assayers in the
state. Virtually everything assayers do is behind the scenes, but the work generally involves
things upon which some operations in the U.S. are based. For example, in a recent request for an
investigation, he coordinated with the U.S. Mint Headquarters Office and Fort Knox Office on
certain information that needed to be confirmed or denied. He does work nationally and
internationally on the basis of metals, commodities, precious metals and other materials not
normally heard about, some that are somewhat exotic and used by the National Aeronautics and
Space Administration. Assayers are basically analytical chemists who test ores and minerals to
determine the value and composition.
He related to Senator Leff that because Arizona is the only state that regulates the field, other
states, national organizations and international companies ask assayers in the state for
assumptions. If the regulation is removed, the basis of those standards would be eliminated. He
advised that assayers write the examination, which is sent to a psychometrician who specializes
in psychology examination writing to make sure the format is acceptable to the standards for test
procedures.
Mr. Dalrymple related that much study was done on licensure examinations in the past 15 years.
Psychometric standards were adopted for examinations because if someone fails and is denied a
license, it may be necessary to defend the failure of that person. It costs about $20,000 to
$30,000 to write an examination. The assayer examination has not been reviewed since 2000, so
it is time for a review. Information may change depending on developments in the field. For
example, Mr. D'Avela said assayers are analytical chemists, so the examination may need to be
expanded to encompass chemical analyst activities. The purpose of reviewing examinations is to
ensure that the examination is current, asks the right questions, and whether it is the proper basis
for denying or granting someone a license to practice. The agency has never been sued and is
trying hard not to be sued. The problem is that only one assayer has been licensed in the last five
years.
Chairman McComish pointed out the statement on Page 8 of the handout (Attachment 9) that
certification of assayers would be a more appropriate level of regulation than the current
registration program. Mr. Dalrymple responded that in many cases, certification programs are
developed where there is no examination, but instead, education, prior experience and personal
references are taken into consideration. It is not given quite the same weight as a license, but it
is a method for a state to restrict people who can practice in a field to those who meet certain
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criteria. The practice is similar to how professional societies certify members and it is a lesser
form of regulation. He indicated to Senator Leff that some national companies may come to
Arizona to use a licensed assayer, but there is probably much activity in other states where
assayers do the work without a license.
(Letters in favor of continuation of the agency from the National Association of State Boards of
Geology [Attachment 10], American Society of Home Inspectors [Attachment 11], Arizona
Home Inspectors Coalition [Attachment 12], and the Chairperson of the Home Inspector Rules
and Standards Committee for the State Board of Technical Registration [Attachment 13]).
Senator Leff moved that the Committee of Reference recommend to the
Legislature that the State Board of Technical Registration be continued for
10 years. The motion carried by a roll call vote of 8-0-0-2 (Attachment 14).
Arizona Power Authority
Joseph Mulholland, Executive Director, Arizona Power Authority, gave a slide presentation
explaining that the Authority was established by the Legislature in 1944 to acquire and market
Hoover power and other renewable resources on behalf of the state. Five commissioners are
appointed by the Governor to serve six-year non-concurrent terms, and those individuals have
extensive experience in Arizona power, water and agricultural issues. The Authority purchases
377,000 kilowatts of power and approximately 1 billion kilowatt hours of energy generated at
Hoover Dam under contracts with the federal government that terminate in 2017, and purchases
transmission service from the federal government to bring power from Hoover Dam to load
centers, primarily in the Phoenix area.
He stated that Hoover generators were overhauled and uprated in 1987. The Authority paid its
share of the uprating with $90 million in revenue bonds that extend through 2017. There is
$55 million outstanding with an average interest rate of 3.5 percent. In addition to the contracts
with the federal government, the Authority has power sales contracts through 2017 for sale of
Hoover power to 30 customers and a scheduling entity agreement with Salt River Project (SRP)
through 2011 to receive power from Hoover Dam to deliver to customers. The Authority is
currently preparing a Wind-Hydropower Integration Feasibility Study for the National
Renewable Energy Laboratory.
Mr. Mulholland indicated that the Authority is coordinating with the Energy Office to implement
the Governor's Executive Order whereby all new state-funded buildings constructed after
February 11, 2005 must derive at least 10 percent of energy from renewable resources, comply
with state energy efficiency standards, and meet or exceed "silver" Leadership in Energy and
Environmental Design standards (Copy of Slide Presentation, Attachment 15). He noted that the
Members were provided with copies of the Authority's 46th Annual Report (Attachment 16) and
-Response to Sunset Review Inquiries (Attachment 17).
Senator Leff noted that a bill was passed several years ago stating that all boards, commissions
and agencies can no longer prepare and distribute fancy annual reports, but instead, make the
information available on the Internet. Mr. Mulholland responded that the Authority's bonds are
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rated by national rating agencies. The Annual Reports are primarily sent to bondholders and
people that buy the bonds, and it costs $19,000 to produce the report.
Senator Cheuvront asked the life span of hydroelectric facilities. Mr. Mulholland replied that
hydroelectric facilities last much longer than fossil and nuclear-type plants where the life
expectancy is 30 to 40 years, and then technology is outdated. Hoover Dam is upgraded and
modified continually, so the project is a very important part of the power program in the
southwestern U.S. Barring some tragedy, the life span is probably hundreds of years.
Chairman McComish asked how much of the total power in Arizona is generated by the
Authority. Mr. Mulholland answered that the total is about 12,000 megawatts and the Authority
generates about 400, so 24 percent. What makes Hoover power so valuable is that it is a peaking
resource, unlike Palo Verde units, which run all the time. The Hoover unit runs only during
peaks and can accelerate very quickly because it only involves putting water through the unit.
Accelerating with a fossil unit or even a gas turbine is like accelerating with a car where there is
much wear and tear on the car and fuel efficiency is reduced. Hydro units do not suffer from
those same problems, which is why the Authority entered into the agreement with SRP to take
advantage ofthat ramping capability.
Chairman McComish recalled that it is more cost effective for SRP than other sources. He asked
how more electricity can be obtained. Mr. Mulholland said that is on the agenda. There will be
a reallocation of power in 2017 among the states of California, Nevada and Arizona, and he
would like to see Arizona receive a larger share than in the past.
Senator Leff moved that the Committee of Reference recommend to the Legislature
that the Arizona Power Authority be continued for 10 years. The motion carried by
a roll call vote of 8-0-0-2 (Attachment 18).
Without objection, the meeting adjourned at 11 :38 a.m.
(Original minutes, attachments and tape are on file in the Office ofthe Chief Clerk).
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Attachment C
COMMITTEE OF REFERENCE
Arizona House of Representatives
Committee on Commerce
Arizona State Senate
Committee on Commerce and Economic Development
PERFORMANCE AUDIT
PURSUANT TO TITLE 41, CHAPTER 27
ARIZONA REVISED STATUTES
OF THE
ARIZONA POWER AUTHORITY
DECEMBER
2005
Commission
MICHAEL C. FRANCIS
Chairman
JOHN I. HUDSON
Vice-Chairman
DALTON H. COLE
DELBERT R. LEWIS
RICHARD S. WALDEN
August 29,2005
ARIZONA POWER AUTHORITY
1810 W. Adams Street· Phoenix, AZ 85007-2697
(602) 542-4263 • FAX (602) 253-7970
Staff
JOSEPH W. MULHOLLAND
Executive Director
RITA K. GALLANT
Executive Secretary
Ms. Diana O'Dell
Arizona House of Representatives
1700W. Washington Avenue
Phoenix, Arizona 85007
RE: Sunset Review Process - Arizona Power Authority
Dear Ms. O'Dell:
In reply to Representative John McComish's letter of June 23, 2005, I enclose an original
and five copies of the Arizona Power Authority's Response to the Sunset Review inquiries
contained in Representative McComish's correspondence. A copy of the Authority's 46th
Annual Report is also enclosed.
The Authority will gladly provide any additional information that might be required by
the Joint Legislative Audit Committee or by the House and Senate Committee assigned to
this matter.
It is my understanding that a public hearing will be scheduled. We look forward to
participating in that aspect of the review process.
Very sincerely,
Joseph W. Mulholland
Executive Director
Enclosures
cc: Arizona Power Authority Commissioners
A150#550\Sunset Reply 8 05
RESPONSE TO SUNSET REVIEW INQUIRIES
ARIZONA POWER AUTHORITY
PART I
1. The objective and purpose of establishing the Authority.
The Arizona Power Authority (Authority), a body corporate and politic, was created
by the State Legislature more than fifty years ago to comply with a requirement of
Federal law that Arizona's share of Hoover hydroelectric power be allocated to the
State or an agency acting on behalf of the State in its sovereign capacity.
Hoover hydroelectric power first became available in 1936, but at that time Arizona
was unable to receive and distribute its share ofpower, while California was making
use ofArizona's allocation. In 1944, the Arizona Legislature created the Authority as
set forth in Arizona Revised Statutes, § 30-101, et seq., charging the Authority with
the responsibility of acquiring and marketing Arizona's 17.5% share ofHoover power,
acting on behalf of the State in its sovereign capacity.
As originally enacted, Chapter 1, Title 30, Arizona Revised Statutes, (the Arizona
Power Authority Act) covered the organization of the Authority and included the
following broad authorizations:
Acquisition and marketing of electric power generated from the
waters of the mainstream Colorado River and from other sources authorized by
law.
Construction, operation and maintenance ofhydroelectric facilities at various
Colorado River and other sites.
Encouragement of activities deemed feasible for the production of electric
power or energy from solar, nuclear or geothermal resources.
1
Disposition of electric power in an equitable manner so as to render the
greatest public service to encourage the widest practical use at lowest possible
cost.
Acquisition, construction and operation of electric transmission systems,
standby or auxiliary plants or facilities to generate electric power.
Negotiation ofagreements for delivery ofpower generated or produced by the
Federal Government or other projects for the benefit of customers.
Negotiation of agreements for inter-connections or pooling with projects,
plants, systems or facilities of other distributors of electric power.
Cooperation with public agencies to conserve, develop, acquire and market
power and transmission resources.
In addition to the Arizona Power Authority Act, the Legislature, in 1967, adopted the Arizona
State Water and Power Plan (A.R.S. § 45-1701 et seq.). This legislation, in large part, was
enacted to provide a financing vehicle for the Central Arizona Project through the Arizona
Power Authority, when it appeared that Federal funding would not be available. This concept
included the construction of various hydroelectric facilities, such as Hualapai Hydroelectric
Project, Marble Canyon Hydroelectric Project, Montezuma Pumped Storage Project, and
Havasu Pumped Storage Project. The Central Arizona Project was ultimately constructed by
the Federal government so a State-funded project never became a reality. Construction of the
other projects mentioned in the statutes was never realized, although the Montezuma Pumped
Storage Project was commenced but later abandoned due to changes in market conditions and
other economic factors.
In later years, the Legislature added the Hoover Modifications and the Hoover Upratings to
the Arizona State Water and Power Plan as Projects that the Authority was authorized to
finance, acquire and construct. As will be discussed later in this Response, the Authority has
successfully financed and constructed its portion of the Hoover Uprating Project at Hoover
Dam.
2. The effectiveness with which the Authority has met its objective and purpose and the
efficiency with which it is operated.
Since its creation in 1944, the Authority has carried out its legislative mandate by
serving low-cost, dependable hydroelectric power to irrigation and electrical districts,
cities, and towns located throughout the State of Arizona. The Central Arizona Water
Conservation District (CAWCD), as the operating agent for the Central Arizona
Project, is one ofthe Authority's largest customers, followed by the Salt River Project.
With the exception of one small "loan" appropriation during the early years of its
existence, the Authority has operated entirely without appropriated funds. The early
2
loan appropriation was essentially a "start-up" fund in the amount of $250,000 which
was fully repaid within a short time. The Authority's revenues are derived solely from
the sale of hydroelectric power and transmission service to more than 30 wholesale
customers.
In 1984, as a part ofthe Authority's negotiation for a renewal of its 50-year contracts
with the United States for Hoover power, the Authority obtained an additional 189
megawatts of low-cost Hoover power with the passage ofthe Hoover Power Plant Act
of 1984, bringing its total allocation to 377 megawatts at nominal operating head at
Lake Mead. Under this Act, the Authority not only negotiated a 30-year renewal of its
original 50-year contract, but it was also authorized, along with the State ofNevada
and various entities in the State of California, to construct, with non-federal funds, the
Hoover Uprating Project (essentially, the rewinding and reconstruction of the
generating units at Hoover to increase their electrical output). As noted earlier, the
Hoover Uprating Project was identified as a Project that the Authority was authorized
to undertake under the State Water and Power Plan. The Authority, utilizing the
financing capabilities granted by the State Water and Power Plan, successfully issued
its first tax exempt revenue bonds in the amount of more than $90 million dollars, the
proceeds of which were utilized to finance the Authority's share of the construction
costs of the Hoover Uprating Project. At present, an amount of approximately $57.5
milliOIi remains unpaid on the Authority's Uprating bonds.
The Authority's power contracts and the budgeting, auditing and accounting of its
finances have been meticulously administered and supervised by the Commission and
its staff for the benefit of the people ofthe State of Arizona, the customers ofthe
Authority and the holders ofthe revenue bonds for which the Authority is responsible.
The Authority's revenue bonds (which carry an "AA" rating by Standard & Poor's)
are secured by the revenues received by the Authority from the wholesale distribution
and sale ofpower and energy to its wholesale contractors pursuant to long-term Power
Sales Contracts with the Authority. By law, the Authority's bonds are revenue
obligations and are not general obligations of the State of Arizona.
The Authority is required by its enabling legislation, its Power Sales Contracts and its
Bond Resolution, to operate on a cost-of-service basis only. Pursuant to its Power
Sales Contracts, the Authority's annual budget is subject to review and comment from
its power contractors prior to adoption by the Authority's Commission.
3. The extent to which the Authority has operated within the public interest.
Over the more than 50 years of its history, the Authority has purchased and marketed
its valuable Hoover hydroelectric resource fulfilling its legislative mandate to provide
power at the lowest possible cost, consistent with sound business principles. Although
the Authority does not market electric power directly to ultimate residential
consumers, it does provide low-cost power to a large number of entities on a
3
wholesale basis which, in turn, are able to market their electric power at a lower cost
than would have been obtainable from other resources. Included among the
Authority's wholesale customers are the Salt River Project, the City ofMesa, the City
of Wickenburg, the City of Page, Electrical District No.2 (a member ofthe Arizona
Electric Power Cooperative), the Central Arizona Water Conservation District (the
operating agent for the Central Arizona Project) and numerous electrical and irrigation
districts throughout Maricopa, Pinal and Yuma counties. (For more information on its
customer base, a listing ofthe Authority's current wholesale power customers is
shown on "Attachment No.1".)
In its Declaration of Purpose and Policy the Legislature, in adopting the State Water
and Power Plan, provided, in part, that "electric power resources and the use of the
energy therefrom must be developed in order to provide effective support for and
implementation ofthe State's water program and to promote the general welfare,
health, safety and prosperity ofthe people of the State." The Authority believes that
its long and successful history of marketing Arizona's share ofFederalhydroelectric
resources and its ability to negotiate a 3D-year extension of its hydroelectric contracts
'(which now expire in 2017) provides convincing evidence that the Authority has
operated with the public interest by providing low-cost electric power to its wholesale
power customers, who, in turn, pass on these savings to their own customers.
In addition, in its power marketing activities, the Authority engages in a full range of
other services, in much the same way as other wholesale power utilities. In order to
enable its power contractors to gain efficiency from variations in demand and electric
load, the Authority engages in pooling activities and enters into capacity and energy
exchanges with other utilities. The Authority, as authorized by law, is not only
responsible for administering its contracts, but operates as a functioning electric
utility.
4. The extent to which Rules adopted by the Authority are consistent with the legislative
mandate.
In March 2003, the Authority's Commission, in response to rapid changes in the
electric power industry, adopted a complete revision ofthe Authority's Rules. In its
initial enabling legislation, the Authority was directed by the Legislature to formulate
plans and develop programs for the practical, equitable and economical utilization of
electric power placed under the Authority's supervision and control. In adopting its
revised Rules, the Authority spent many months carefully crafting provisions that
address the Legislature's mandate. While the statutory scheme for the Authority
provides substantial guidance in the acquisition and distribution of electric'power in
Arizona, the Rules adopted by the Commission have been designed to "flesh out" the
statutory schemes in the State Water and Power Plan and the Arizona Power Authority
Act, with an eye to assuring a full public process wherever necessary and enhancing
and protecting the Authority's contractual relationships with the United States and
with its power contractors in Arizona. The Rules are designed to insure that electric
4
power available to the Authority is marketed on a practical, equitable and economic
basis and meet the Authority's mandate to provide power at the lowest possible cost
consistent with sound business principles.
In keeping with the Authority's utility functions, its Rules provide a detailed public
process by which long-term power is made available to eligible entities. The Rules
also spell out the procedure by which eligible entities may apply for electric service
and, if power is available under the Arizona Power Authority Act, a detailed method is
established by which an applicant may obtain a Power Purchase Certificate (which
specifies the geographic boundaries within which power supplied by the Authority can
be utilized).
With the aid ofits customers, the Authority is authorized to maintain a system of
electric load scheduling in order to reasonably predict current and future power needs
and to identify additional sources ofelectric power or transmission service that may
become either temporarily or permanently available to the Authority for power
distribution on a state-wide basis to eligible entities.
5. The extent to which the Authority has encouraged input from the public before
adopting its Rules and the extent to which it has informed the public as to its actions
and their expected impact upon the public.
As explained above, the Authority, in 2003, adopted a total revision of its Rules.
Before adopting the revised Rules, the Authority expended more than two years in
drafting and developing the Rules in their current form. The Rules were developed in
conformity with the Arizona Administrative Procedures Act, but also included
numerous meetings with the Authority's customers, prospective customers and
members ofthe public, during which oral and written comments were solicited and
accepted, resulting in a series of drafts and redrafts that were submitted for comment,
correction and addition.
Before adoption of the Rules, the Authority, in addition to the publications required by
the Administrative Procedures Act, gave public notice on at least two separate
occasions, seeking input from the general public as well as from prospective and
existing power customers and the electric utility industry in general. In addition, at
each of its regularly scheduled monthly Commission meetings, the public is invited to
make comments on pending matters. No action is taken by the Commission without
full expectation of, and participation by, the public in open public meetings.
To the extent that any specific action of the Authority is anticipated (as for example, if
a new supply ofpower were to become available to the Authority for allocation), a full
public process with advance public notice is provided both by statute and by the
Authority's Rules.
5
When the original 50-year Hoover Contracts expired in 1987, it was necessary for the
Authority, prior to the expiration date, to design and implement a reallocation process
by which old and new customers could participate in a public process to apply for, and
receive, Hoover power. The reallocation effort took more than two years to complete
and entailed numerous public meetings with both written and oral input from the
public, from other Arizona utilities, and from current and prospective purchasers of
electric power. The reallocation effort culminated in the adoption of the Authority's
Post-1987 Final Hoover Power Marketing Plan (as set forth in the Authority's "Red
Book" dated June 17, 1985). The Red Book contains the Authority's formal findings
concerning eligibility for allocation ofHoover Power, a full discussion ofpublic
comments and a statement ofthe conditions under which the Authority's new Power
Sales Contracts were negotiated and executed.
6. The extent to which the Authority has been able to investigate and resolve complaints
that are within its jurisdiction.
Although the Authority has not been presented with any "complaints", the Authority,
under its currently-adopted Rules, when read in conjunction with the Arizona
Administrative Procedure Act, is well equipped and capable of investigating and
dealing with any complaints that might arise. The Authority believes that its "open
door" policy is very useful in discussing and disposing of customers' or public issues
before they reach the "complaint" stage.
7. The extent to which the Attorney General or any other applicable agency ofthe State
government has authority to prosecute actions under the enabling legislation.
The only "action" that might occur under its enabling legislation would be the
enforcement of the Authority's contractual commitments and responsibilities under its
contracts with the Federal Government, with its customers and its bondholders.
Therefore, any legal actions would not ordinarily result from the provisions of the
Authority's enabling legislation, but would result from its business and contractual
relationships between various entities. The office of the Attorney General would have
the authority to participate in any legal proceedings necessitated by the Authority's
power marketing and utility functions, keeping in mind that the Authority is not a
regulatory agency.
8. The extent to which the Authority has addressed deficiencies in its enabling statutes
which prevent it from fulfilling its statutory mandate.
Since its inception some 50 years ago, the Authority has rarely faced any difficulty in
complying with its statutory mandate, a tribute to the initial drafters ofthe·Authority's
enabling legislation and the drafters ofthe Arizona State Water and Power Plan. The
Authority has always enjoyed a cooperative spirit in dealing with the Legislature and
6
on the rare occasions that statutory changes were deemed necessary (as for example,
adding to the list ofProjects which the Authority is authorized to undertake under the
State Water and Power Plan), the Authority has found a willingness among the
members of the Legislature (and staff personnel) to understand and appreciate the
necessity of any requested change in the statutory scheme.
9. The extent to which changes are necessary in the laws of the agency to adequately
comply with the factors listed in this subsection.
The Authority does not believe there is a present need to revise its enabling legislation
nor the provisions of the State Water and Power Plan, but does not wish to foreclose
the possibility of statutory revisions to address the rapid changes taking place in the
electric power industry.
10. The extent to which the termination of the agency would significantly harm the public
health, safety or welfare.
A termination of the Authority would have the following significant adverse results:
(A) Termination would impact the Authority's ability to perform its obligations
under its outstanding 30-year contracts with the United States and more than
30 separate power sales contracts with cities, towns and electrical and
irrigation districts, the payments from which secure the Authority's revenue
bonds; these contracts do not expire until 2017.
(B) The Hoover Power Plant Act of 1984, enacted by Congress as a vehicle by
which to renew Hoover hydroelectric power contracts and add additional
capacity to the Hoover generating plant, specifically allocated Arizona's share
ofHoover power to the Arizona Power Authority. The Act also authorized the
Authority to undertake construction of its portion ofthe Hoover Uprating
Project. Ifthe Authority were terminated, the Federal allocation of the State's
share of Hoover power would undoubtedly be jeopardized.
(C) The Boulder Canyon Project Act of 1928 specifically allocates the
hydroelectric resource from Hoover equally between Arizona, Nevada and
California. Termination of the Authority would leave Arizona without an
entity to receive Arizona's share of Hoover power on behalf of the State.
(D) In 1996, the Legislature adopted legislation that provides that the Authority
will continue in existence until the debts and obligations ofthe Authority are
fully satisfied (See A.R.S. § 41-3006.04, a copy ofwhich is attached as
"Attachment No.2"). The Authority, in issuing its Power Resource Revenue
Bonds, gave assurances to its bondholders that the Authority would continue
its existence and enforce its covenants and contracts as long as the Authority
7
has any outstanding debts or obligations (bonds) that were issued to finance the
cost of the Hoover Power Plant Uprating Project. Any tennination ofthe
Authority would conflict with such assurances, resulting in a possible default
in the Authority's bond covenants.
(E) If the existence ofthe Authority were tenninated without naming a successor
that is authorized by law to succeed to the utility functions of the Authority, the
tennination could cause the Authority to default under its 30-year contracts
with the United States (through the Western Area Power Administration of the
Department ofEnergy) as well as cause a default under its Power Sales
Contracts with its customers which would eventually cause a default under the
Authority's bond covenants.
(F) The excellent financial ratings of the Authority's revenue bonds could be
adversely affected, because the ratings of its bonds are dependent upon
professional utility management and a staff that is capable ofcarrying out
utility operations and functions, including the management ofthe disposition
of power and energy required by the Power Sales Contracts.
11. The extent to which the level of regulation exercised by the Authority is
appropriate and whether less or more stringent levels of regulation would be
appropriate.
As indicated earlier, the Authority is not a regulatory agency except in tenns of
monitoring its contractual relationships with the United States and its customers and in
the administration of power under its jurisdiction. It is not, for example, a regulatory
agency in the sense that the Arizona Corporation Commission regulates various
activities, such as the retail rates at which public service corporations may sell electric
power to retail consumers.
The Authority does not envision or encourage any greater level of regulation.
12. The extent to which the Authority has used private contractors in theperfonnance of
its duties and how effective use of private contractors could be accomplished.
The Authority is unable to use private contractors, because the use ofprivate
contractors to perfonn the Authority's governmental functions would result in a
violation of its covenants to maintain the exclusion ofthe interest on its bond from
Federal income taxation. The Internal Revenue Code of 1986, as amended, has strict
rules with respect to any privatization of the Authority's bond~financed activities.
Furthermore, the Authority is a "preference" entity under Federal law and it must
retain its preference status in order to carry out many of its statutory functions. A
private contractor cannot qualify as a Federal preference entity.
8
INFORMATION ABOUT THE AUTHORITY'S STAFF
Presently, the Authority's staff consists of an Executive Director, who has the overall
responsibility for the administration, policies and management of the Authority, plus "hands­on"
expertise in carrying out the Authority's funding functions and operations. Additional
staffmembers are responsible for power scheduling and marketing, with oversight in the areas
of pooling and exchange arrangements between the Authority and its customers, finance and
fiscal affairs, and in cooperation with the State Treasurer, responsibility for budgeting, receipt
and expenditure of funds, both with respect to the Authority's revenue bond transactions and
with respect to the Authority's other operating and revenue requirements. Staff is also
actively involved in the search and development of other generation (including renewable
energy sources) and transmission resources, to provide economical and reliable electric power
and transmission for the State.
PART II
ADDITIONAL INFORMATION
REQUESTED BY THE COMMITTEE
1. An identification of the problem or the needs that the agency is intended to address.
The Authority is not aware of any problems that should be addressed in connection
with its operations.
As reflected in earlier responses, one of the Authority's major obligations is to provide
dependable low-cost power to its qualified wholesale power customers.
In recent months, the electric utility industry, in general, and the Authority, in
particular, has been facing increasing challenges in the areas of cost control and power
supply.
The Authority's primary resource is hydroelectric generation at Hoover Dam.
Availability of power at Hoover is dependent on water releases. The continuing
drought in the Southwest has seriously affected the Colorado River watershed, making
it necessary for the Authority to participate in contingency planning to avoid loss of
generation at Hoover. Also, escalating costs for environmental programs and national
security present substantial problems for the Authority and its customers. The
Authority works with numerous local and Federal agencies to address such issues.
9
2. A statement to the extent practicable, in quantitative and qualitative terms, of the
objectives ofthe Authority and its anticipated accomplishments.
OBJECTIVES:
a. Acquire and Market Power
Power Contracts with Western
Transmission Contracts with Western
Power Sales Contracts with Customers
Scheduling Entity Agreement with Salt River Project
Resource Exchange Arrangements with Customers
b. Construction/Operation on Colorado River
Hoover Power Plant Act of 1984
Financing and Construction ofHoover Modifications
c. Encourage Renewables
History of Involvement
National Research Labs (NREL) Contract
Develop Renewable Energy Credits
Native American Efforts
d. Develop Power and Transmission Systems
Transmission Funding Effort to Reduce Costs by Use of Revenue
Bonding Capability
Build on Bonding/Funding Experience to Assist in New Transmission
for the Southwest
10
e. Agreements for Delivery ofPower Generated by Federal Entities/Others
(See (a) above)
f. Cooperation with Public Agencies
Hoover Implementation Agreement - (Western, Bureau of
Reclamation, States of Arizona, Nevada and California)
Hoover Engineering & Oversight Committee
Colorado River Energy Distributors Association
American Public Power Association
National Electric Reliability Counsel
Electrical and Irrigation Districts' Interaction
Federal Multi-Species Conservation Program
3. An identification of any other agencies having similar conflicting or duplicate
objectives, and an explanation ofthe manner in which the agency avoids duplication
or conflict with other such agencies.
As noted earlier, the Authority was created to fulfill a'Federal requirement that the
State, or an agency acting on behalfof the State in its sovereign capacity, enter into
contracts with the United States to obtain and market Arizona's share of hydroelectric
power generation at the Boulder Canyon Project (Hoover Dam).
The Authority, as a body corporate and politic of the State ofArizona, fulfills both
Federal and State mandates that are not duplicated by any other agency of the State.
No other State agency has the same goals, objectives or obligations nor, in the
Authority's view, is any other state agency qualified or equipped to carry out the
responsibilities of the Authority.
4. An assessment of the consequences of eliminating the agency or consolidating it with
another agency.
Please see the Authority's response to Items No.1 0, Part I and No.3, Part II which, in
part, address the difficulty and consequences of eliminating the Authority and discuss
the unique role assigned to the Authority by both Federal and State law.
11
To summarize, eliminating the Authority would cause virtually unsolvable problems
with the Authority's outstanding contractual and statutory commitments to the United
States, to the Authority's power customers and to the citizens of the State of Arizona
for whose ultimate benefit the Authority receives and markets electric power
generated from the Colorado River.
The Authority does not believe that there is another agency that is either qualified or
permitted by law to carry out the Authority's electric utility functions. Assuming, for
argument, that such an agency exists, the Authority does not believe that consolidation
would achieve any useful purpose and, instead, at a minimum, would result in an
increase in costs to the Authority and its customers; at a maximum, a default on the
Authority's contracts would result.
Among the difficulties that would be encountered if the Authority were eliminated are:
a. Failure to comply with a requirement ofFederal law that Hoover contracts to
be entered into with the Authority as the State's representative in its sovereign
capacity.
b. Interruption and default in the Authority's performance of its contracts with the
United States and its wholesale power customers.
c. If contract default occurred, it would trigger a default in the Authority's
Revenue Bonds.
d. The Authority's "AA" Bond Rating reflects the rating agencies' reliance on the
Authority's multi-year history of uninterrupted service and its ability to
perform its utility functions. The rating agencies would immediately
downgrade the Authority's bonds or perhaps refuse to give a rating at all.
Any effort to consolidate the Authority with another agency could generate essentially
the same problems as eliminating the Authority.
5. Describe any major activities/projects, accomplishments or obstacles to success.
In brief, the Authority has undertaken or is currently pursuing the following projects
and activities:
Negotiated and obtained a 50% increase in Arizona's entitlement to Hoover
hydropower.
Obtained a 30-year extension ofthe Authority's Hoover power contracts.
Issued its $90 million Power Resource Revenue Bonds to pay for its share of
the uprating of the electric generators at Hoover Dam.
12
Negotiated and reallocated its Hoover power resource among eligible Arizona
users under contracts expiring in 201 7.
Successfully participated in several Federal court challenges to the Authority's
Hoover resources.
Over a period often or more years, played a major role in the development and
adoption ofthe Lower Colorado River Multi-Species Conservation Program
(LCR-MSCP), a $620 million partnership between Arizona, California and
Nevada and the Federal government for the protection ofendangered species
along the Colorado River.
Playing a key role in the ongoing efforts to develop a program ofrenewable
energy credits to assist in the development and utilization of renewable energy
resources in Arizona.
Engaging in the early and current efforts to explore the viability of wind power
as an alternative power resource for Arizona users, especially Native
Americans.
Assisting Native American Tribes with their planning and distribution of
power resources on tribal lands.
Ongoing oversight ofthe operations and expenditures of the Federal
Government with regard to the operations of Hoover Dam and the marketing
and transmission of Federal hydropower.
Participation and membership in numerous Federal and State organizations that
are concerned with the reliability and cost of providing and transmitting
electric power on the national and local grid.
Monitoring and participation in drought-related activities on the Colorado
River.
Continuing efforts to ensure that the Authority's customers have access to
reliable, cost-based power and energy to serve current and future needs.
6. Provide a copy of the Authority's most recent Annual Report, including financial data
that outlines the fee structure, expenditure and revenues and number ofFTEs.
A copy of the Authority's 46th Annual Report (2004) is included with this Response.
13
The Authority does not have a "fee structure" as such. The Authority's revenues are
derived from electric power rates charged to its wholesale power customers under
long-term power sales contracts that expire in 2017. The establishment of its power
rates is a function carried out by the Authority Commission in keeping with its
statutory and contractual commitments.
Currently, the Authority has twelve FTEs.
The Authority's staff consists ofan Executive Director, who, subject to the direction
of the Authority Commission, has the overall responsibility for the administration,
policies and management ofthe Authority, plus "hands-on" expertise in carrying out
the Authority's utility functions and operations. Additional staffmembers are
responsible for power scheduling and marketing, with oversight in the areas of pooling
and exchange arrangements between the Authority and its customers, finance and
fiscal affairs, and, in cooperation with the State Treasurer, responsibility for investing,
budgeting, receipt and expenditure of funds, both with respect to the Authority's
revenue bond transactions and with respect to the Authority's other operating and
revenue requirements.
7. The composition and manner of appointment of the Arizona Power Authority
Commission.
The purposes and policies of the Authority are carried out through the Arizona Power
Authority Commission, composed of five members appointed by the Governor with
the consent of the Senate.
The term of office for each member is six years. Members of the Commission must be
electors qualified by administrative and business experience. No member may hold
any other salaried public office or be associated with any public service corporation
engaged in generating, distributing or selling power to the public generally in this
State for profit.
No Commission member may have an interest in any business that may be adversely
affected by the operation of the Authority. Members of the Commission may be
removed by the Governor for cause.
The following is a list of the current members of the Commission with a brief
biographical statement concerning each Commissioner and the expiration date ofthe
Commission Member's term of office:
Michael C. Francis, Chairman:
Starting his tenure on the Commission in 1999, Mr. Francis was selected Chairman in
April 2003 and re-elected to this position in 2005. In addition to his invaluable work
14
on the Commission, Mr. Francis is a partner in Santa Lucia Farms, producer of over
3.7 million garden rose bushes annually. Mr. Francis also owns and operates Francis
Insurance Agency, which insures Arizona and California farmers. Mr. Francis is a
Board of Directors member ofM&I Bank, Arizona Region. He is also a member of
the American Rose Society. His current term expires in January 2008.
Lt. General John I. Hudson (Ret.), Vice-Chairman:
First appointed to the Arizona Power Authority Commission in March 2000, John 1.
Hudson was elected Vice Chairman in May 2003 with his current term expiring in
2006. A retired Lieutenant General in the U.S. Marine Corps where he served for 37
years, John Hudson is a member ofthe Board ofDirectors ofthe Yuma Regional
Medical Center. In addition, he is a member and past chairman of the Greater Yuma
Port Authority Board ofDirectors, a founding Director ofthe Foothills Bank ofYuma,
a member ofthe Foothills Rotary Club ofYuma and past president ofYuma's 78­CRIME
Board of Directors.
Richard S. Walden:
Appointed to the Commission in 1984 and re-appointed through his present term
expiring in 2010, Mr. Walden is the President and CEO of Farmers Investment
Company, a family-owned, pecan growing and processing company headquartered in
Sahuarita, Arizona. Mr. Walden is a member of the Board ofthe International Tree
Nut Council and in that capacity serves as the chairman ofthe Committee for
Nutrition and Education associated with the Nutrition and Education Foundation. Mr.
Walden is also a former member of the Advisory Council on Small Business and
Agriculture for the Federal Reserve Bank of San Francisco and a member of the Board
ofthe National Pecan Shellers Association.
Dalton H. Cole:
Appointed to the Commission in January 2002 for a term to run until 2008, Dalton
Cole is a retired businessman and farmer. A past member ofthe Central Arizona
Water Conservation District Board, Mr. Cole co-founded and chaired the HoHoKam
Irrigation District. For 18 years, he also served on the board ofElectrical District No.
2 in Pinal County and is a past chairman. In addition, Mr. Cole is a past chairman of
the State Board ofDirector for Community Colleges. He has served on the Ground
Water Management Committee for Pinal County, as well as advisory committees to
the Arizona Legislature regarding water and power issues.
15
Delbert R. Lewis:
First appointed to the Arizona Power Commission in April 2003, Delbert Lewis has
been reappointed for a six-year term ending in January 2010. As one of the founders
ofKTVK Channel 3 and the CEO ofMAC America Communications, Inc., Mr.
Lewis' past and present civic affiliations include the Arizona Broadcasters
Association, Metropolitan Phoenix Broadcasters, Phoenix Chamber of Commerce,
Samaritan Health Services, Greater Phoenix Leadership, the National Conference,
Maricopa County Sports Authority and Orpheum Theatre Foundation. Now farming
4,000 acres of farmland near Florence, Arizona. Mr. Lewis and his late wife, Dr.
Jewell Lewis, have been nationally recognized for their financial support and
commitment to education and community service.
* * * *
August 29, 2005
A150#550lRespToSunsetInquiries
16
ARIZONA POWER AUTHORITY
WHOLESALE CUSTOMERS
Aguila Irrigation District
Ak-Chin Indian Community*
Arizona Electric Power Cooperative*
Arizona Public Service Company*
Avra Valley Irrigation & Drainage District
Buckeye Water Conservation District
Central Arizona Water Conservation District
Chandler Heights Citrus Irrigation District
Citizens Utilities Com,pany
City ofMesa*
City ofPage
City of Safford
City of Thatcher
City ofWickenburg
Cortaro-Marana Irrigation District
Electrical District No.2, Pinal
Electrical District No.3, Pinal
Electrical District No.4, Pinal
Electrical District No.5, Maricopa
Electrical District No.5, Pinal
Electrical District No.6, Pinal
Electrical District No.7, Maricopa
Electrical District No.8, Maricopa
Harquahala Valley Power District
McMullen Valley Water Conservation & Drainage District
Ocotillo Water Conservation District
Tohono O'Odham Utility Authority*
Queen Creek Irrigation District
Roosevelt Irrigation District
Roosevelt Water Conservation District
Salt River Project
San Carlos Project*
Silverbell Irrigation & Drainage District
Tonopah Irrigation District
Tucson Electric Power Company*
Wellton-Mohawk Irrigation & Drainage District
*Have contract but not presently receiving allocation.
Attachment No.1
A150#550lRespToSunsetinquiries
17
§ 41-3006.04. Arizona power authority; conditional termination July 1, 2006
A. The Arizona power authority terminates on July I, 2006, and title 30, chapter 1, article
1 is repealed on January 1,2007, if the authority:
1. Has no outstanding contractual obligations with the United States or any United States
agency.
2. Has no outstanding debts or obligations that were issued to finance the cost of the
Hoover power plant modifications project or the Hoover power plan uprating project.
3. Has otherwise provided for paying or retiring these debts or obligations.
B. If any contractual debt or obligation listed in subsection A exists and no satisfactory
provision has been made to payor retire the debt or obligation, the authority, and title 30,
chapter 1, article 1, shall continue in existence until the debt or obligation is fully satisfied.
Added by Laws 1996, Ch. 10, § 2, eff. July 20, 1996, retroactively effective to July 1, 1996.
Attachment No.2
A150#550lRespToSunsetinquiries
18
QQ, ..
LETTER TO THE GOVERNOR 2
REPORT OF THE EXECUTIVE DIRECTOR 3
REPORT OF THE COMMISSION .4
OPERATIONS AND THE ENVIRONMENT 5
SCHEDULE OF CAPACITY AND ENERGY SALES 6
REPORT OF INDEPENDENT ACCOUNTANTS .7
MANAGEMENT'S DISCUSSION AND ANALYSIS 8
[REQUIRED SUPPLEMENTARY INFORMATIONl
FINANCIAL STATEMENTS -.. 14
STATEMENT OF NET ASSETS 14
STATEMENT OF REVENUES, EXPENSES
AND CHANGES IN NET ASSETS 15
STATEMENT OF CASH FLOW 16
NOTES TO FINANCIAL STATEMENTS 18
DEBT SERVICE COVERAGE RATIO 26
I
~~~~~~~~~~~~~~=~zcb
LETTER TO THE GOVERNOR ~I
December 1, 2004
The Honorable Janet A. Napolitano
Governor of Alizona
State Capitol
Ninth Floor, West Wing
Phoenix,.f\.Z 85007
Dear Governor Napolitano:
This 46th Annual Report of the Arizona Power Authority details the AuthOlity's operation and
financial activities for the fiscal year ending June 30, 2004. This report highlights the Autholity's
efforts in administering Arizona's hydroelectric power entitlement generated at Hoover Dam
located on the Colorado River. Although the Colorado River system is entering into the sixth
year of a severe drought, the system, including Lake Mead and other reservoirs, still retains
approximately fifty percent of its maximum water reserve in storage. Therefore, the state's
water and power entitlements, although at reduced levels of electric generation, will continue
to be available for the foreseeable future.
In addition, the Authority is actively engaged in studying supplemental electric power generation
resources that might be cost effective in supplementing our valuable hydro resource. The development
of renewable, electric power resources within the state will further the long-term goal of reducing
Arizona's dependency on external energy resources.
Sincerely,
~L
Michael C. Francis
Chairman
JOE MULHOllAND
9
The prolonged drought along the Colorado River Basin
remains a selious challenge for the Authority and its customers.
Some observers speculate that the extended drought marks
a new period of drier weather for the southwest. Others
contend that, given the dry years, a wet winter is inevitable.
The fact is, we do not know what the weather brings.
However, we do know, that improving performance is the
best preparation for the challenges the future may bring;
and, to that end, the Authority has embarked on a series
of programs to improve its overall performance.
First, the Authority has achieved significant budget discipline
as a result of revised expenditure reviews and streamlined
budget analyses implemented in recent years. In early
2005, the AuthOlity will refund approXimately $1 million
to its customers, which represents about a 7% reduction in
their power payments to the Authority. Monthly rate
reviews will continue to verify that the rates are in line with
our costs, ensuring stability and the lowest rates possible
without jeopardizing operations or debt service obligations.
To further control expenditures and mitigate any price jumps
that could result from drought limited power production, the
Authority is exploring additional cost-saving measures. These
include the possibility of purchaSing long-term transmission
rights on the Western Area Power Administration's
transmission system through the prepayment of high
interest debt which, in tum, could lower charaes to our b
customers by approximately $400,000 annually.
The Authority has analyzed the flows on the Colorado River
to develop a better understanding of what we might expect
for the future. In addition, we are studying the feaSibility of
installing low water level turbines at Hoover to improve
efficient operation during low water conditions.
As always, security at Hoover Dam remains a top priority.
Construction of a new bridge between Arizona and Nevada
is expected to be completed in 2008. This new bridge will
reroute non-essential traffic away from Hoover Dam, thus
improving overall seclirity.
The Authority is also participating in a Multi-Species
Conservation Program to improve the environment and habitat
for endangered and threatened species along the Lower
Colorado River Basin. This pro-active 50-year program will
rejuvenate many of the endangered and threatened species
that dwell in the Lower Colorado River Basin and will also
provide additional safeguards to ensure that generation at
Hoover Dam is not threatened by environmental problems.
In addition, the Authority is looking allead in the area of
renewable energy, having recently received a grant from the
National Renewable Energy Laboratory to study integrating
wind and hydropower generation. The study will lead to a
multi-year feasibility contract to help introduce new reliable
energy sources into Arizona.
Through these and other initiatives, we remain optimistic
about the AuthOrity's ability to meet its mandate to provide
low cost power wIllie assisting in the development and
improving power availability to our customers and the citizens
throughout the state of Arizona. I .-l
it
REPORT OF THE COMMISSION ~I
The Arizona Power Authority was established in 1944 to administer Arizona's entitlement to hydroelectric power generated at
Hoover Dam and Powerplant located on the Colorado River. Additionally, the Autll0rity is autllorized to develop low-cost,
electrical power generation and transmission facilities within the state for Arizona's citizens. The Authority recently passed its
40th anniversary of faithfully providing low-cost hydroelectric power to tlle consumers of the state. Due to the continued severe
drought impacting the Colorado River Basin, the AutllOrity is aggressively investigating and researching new and sustainable
renewable energy resources that could help reduce Arizona's dependency on external power resources.
MICHAEL C. FRANCIS - Chairman
Starting his tenure on the commission in 1999, Mr. Francis was selected Chainnan in April 2003. In addition to his
invaluable work on the commission, Mr. Francis is a partner in Santa Lucia Farms, producer of over 3.7 million
garden rose bushes annually. Mr. Francis also owns and operates Frances Insurance Agency, which insures Arizona
and California fanners. Mr. Francis is a Board of Directors member for M&I Thunderbird Bank, Arizona Region.
He is also a member of the Anierican Rose Society. His cun-ent term e},.-pires in January 2008.
LT GEN JOHN I. HUDSON - Vice Chairman
First appointed to the Arizona Power Authority Commission in March 2000, John 1. Hudson was elected to the
Vice Chair in May 2003 with his cunent tenn expiring in 2006. A retired Lieutenant General in the U.S. Marine
Corps where he served for 37 years, John Hudson is a member of the Board of Directors of the Yuma Regional
Medical Center. In addition, he is a member and past chainnan of the Greater Yuma Port Authority Board of
Directors, a founding Director of the Foothills Bank of Yuma, a member of the Foothills Rotary Club of Yuma
and past president of Yuma's 78-CRIME Board of Directors.
RICHARD S. WALDEN
Appointed to the Commission in 1984 and re-appointed through his present term expiring in 2010, Mr. Walden is the
President and CEO of Fanners Inveshnent Co., a family-owned, pecan growing and processing company headquartered
in Sahullrita, Arizona. Mr. Walden is a member of the board of the International Tree Nut Council and in that capacity
serves as the chainnan of the Committee for Nutrition and Education assoeiated with the Nutrition and Education
Foundation. Mr. Walden is also a member of the Advisory Council on Small Busirtess and Agriculture for the
Federal Reselve Bank of San Francisco and a member of the Board of the National Pecan Shellers Association.
DALTON H. COLE
Appointed to the Commission in January 2002 for a tenn to run until 2008, Dalton Cole is a retired businessman
and fanner. A past member of the Central Arizona Water Conservation District Board, Mr. Cole co-founded and
chaired the HoHoKam Imgation District. For 18 years he also served on the board of Electrical District No.2 in
Pinal County and is a past chainnan. In addition, Mr. Cole is a past chainnan of the State Board of Directors for
Community Colleges. He has served on the Ground Water Management Committee for Pinal County, as well as
advisory committees to the Arizona Legislature regarding water and power issues.
DELBERT R. LEWIS
First appointed to the Arizona Power Commission in April 2003, Delbert Lewis has been reappointed for a
sb:-year tenn ending in January 2010. As one of the founders ofKTVK Channel 3 and the CEO of MAC America
Communications, Inc, Mr. Lewis' past and present civic affiliations include the Arizona Broadcasters Association,
Metropolitan Phoenix Broadcasters, Phoenix Chamber of Commerce, Samaritan Health Services, Greater Phoenix
Leadership, the National Conference, Maricopa County Sports Authority and Orpheum Theatre Foundation.
Now farming 4,000 acres of fannland near Florence, Arizona. Mr. Lewis and his late wife, Dr. Jewell Lewis, have
been nationally recogrrized for their fInancial support and commitment to education and community service.
1~..oPERATIONS & THE Et'-JVIRONMENT
COLORADO RIVER OPERATIONS
Water year 2004 marked the fifth consecutive year with below average inflow
into Colorado River reservoirs, including Lake Mead. Unregulated inflow to Lake
Powell, upriver of Lake Mead, was 62, 59, 25, 51, and 51 percent for water years
2000 through 2004 respectively. Reservoir storage at Lakes Powell and Mead
declined for the fifth straight year. During the year, Lake Mead reservoir storage
decreased by 1.681 million acre-feet (maf) and Powell decreased by 2.941 maf.
At the beginning of the 2004 water year, the Colorado River system's total storage
was 57 percent of capacity. As of September 30, 2004, total system storage was down
7 more percent to 50 percent of capacity, a decrease of approximately 4.238 maf.
Under the most probable inflow scenario, the downstream delivery requirements
are expected to control water releases from Hoover Dam. Therefore, the normal
condition is the clitelion governing the operation of Lake Mead for calendar
year 2005 pursuant to the Colorado River Annual Operating Plan and Supreme
Court Decree. Reclamation does not anticipate any available unused state water
apportionment for calendar year 2005.
'H- **
THE ENVIRONMENT
The voluntary Lower Colorado River
Multi-Species Conservation Program has
continued in development throughout the
past year. Most notably accomplished, the
Memorandum of Agreement was executed
among the Secretary of the Interior and
the states of Arizona, California and Nevada
on September 14, 2004. This is a 50-year
agreement whereby the federal and
non-federal participants each share fifty
percent of the total $626 million program
cost. Various implementation documents
and agreements are now being negotiated
among the parties, which will place the
Memorandum of Agreement into effect.
The follOwing graph illustrates
the AuthOrity's histOlical
energy sales (GWh) since
1996 for power obtained
from the Hoover Powerplant
and for supplemental sales.
Supplemental power is
obtained by the Authority for
sale to customers on an "as
requested" basis. This energy
augments the customers'
allocation from the AuthOrity.
._ilOOm ENERGY SALES _iSUPPLEMENTAL ENERGY SALES
~
~--{.
1996 1997 1998 1999 2000 2001 2002 2003 2004
FISCAL YEAR 1996 1997 1998 1999 2000 2001 2002 2003 2004
HOOVER 792 1,485 1,389 1,318 1,205 1,103 1,098 899 753
SUPPLEMENTAL 224 ~ 3 2 4 0 0 0 0
TOTAL 1,016 1,564 1,392 1,320 1,209 1,103 1,098 899 753
i~
E.
r
SCHEDULE OF CAPACITY AND ENERGY SALES ~I
AVERAGE ENERGY MillS PRIOR
BILLING DEMAND DELIVERED SALES PER YEAR
SALE OF HYDRO POWER (KW) (KWH) ($) KWH ADJ. ($)
Customers
Aguila Irrigation District 4,740 9,430,000 181,636 19.26 ($6,460.68)
AVTa Valley Irrigation & Drainage District 475 2,495,000 35,298 14.15 ($890.73)
Buckeye Water Conseration District 2,245 7,243,000 122,391 16.90 ($3,325.41)
Central Arizona Water Conservation District 121,758 175,918,000 3,796,409 21.58 ($159,554.62)
Chandler Heights Citrus Irrigation District 701 2,681,000 33,580 12.53 ($1,244.30)
Cortaro-Marana Irrigation District 4,852 22,007,000 273,761 12.44 ($7,841.61)
Electrical District No.1, Pinal 0 0 0 0.00 $0.00
Electrical District No.2, Pinal 14,656 54,281,000 854,213 15.74 ($24,115.82)
Electrical District No.3, Pinal 11,980 70,735,000 1,055,343 14.92 ($19,687.18)
Electrical District No.4, Pinal 14,655 51,809,000 745,062 14.38 ($25,528.03)
Electrical District No.5, Pinal 11,129 37,443,000 534,532 14.28 ($18,823.38)
Electrical District No.5, Maricopa 265 1,421,000 17,879 12.58 ($473.82)
Electrical District No.6, Pinal 6,035 18,264,000 242,632 13.28 ($9,993.32)
Electrical District No.7, Maricopa 7,910 12,350,000 253,418 20.52 ($10,710.32)
Electlical District No.8, Maricopa 18,234 57,236,000 972,224 16.99 ($26,295.76)
Harquallala Valley Power District 1,876 9,262,000 142,538 15.39 ($2,829.13)
Maricopa County Municipal Water District #1 6,661 14,444,000 272,793 18.89 ($9,316.85)
McMullen Valley Water 6,850 15,297,000 284,204 18.58 ($9,436.30)
Conservation & Drainage District
Ocotillo Water Conservation District 1,801 6,962,000 88,363 12.69 ($2,930.23)
Queen Creek Irrigation District 1,334 2,121,000 27,138 12.79 ($2,035.17)
Roosevelt Irrigation District 2,426 12,579,000 190,512 15.15 ($3,986.75)
Roosevelt Water Conservation District 5,094 18,361,000 257,522 14.03 ($8,779.92)
Salt River Project 29,225 119,046,000 1,727,480 14.51 ($47,430.34)
San Tan Irrigation District 393 1,641,000 20,724 12.63 ($797.03)
Silverbell Irrigation & Drainage District 536 4,455,000 54,058 12.13 ($1,129.46)
Tonopall Irrigation District 1,168 4,668,000 75,324 16.14 ($1,770.70)
Wellton-Mohawk Irrigation & Drainage District 2,192 8,824,000 129,992 14.73 ($3,5.59.02)
City of Page 784 983,000 23,399 23.80 ($1,031.91)
City of Safford 1,568 3,598,000 62,057 17.25 ($2,371.92)
Town of Thatcher 792 2,476,000 36,887 14.90 ($1,287.19)
Town of Wickenburg 1,725 4,916,000 82,757 16.83 ($2,982.24)
Ak-Chin Indian Community 0 0 0 0.00 0
Arizona Electric Power Cooperative 0 0 0 0.00 0
Arizona Public Service Company 0 0 0 0.00 0
Citizens Utilities Company 0 0 0 0.00 0
City of Mesa 0 0 0 0.00 0
Tohono O'odham Utilities Authority 0 0 0 0.00 0
San Carlos Project 0 0 0 0.00 0
Tucson Electric Power Company 0 0 0 0.00 0
TOTAL HYDRO POWER SALES 284,056 752,946,000 $12,594,126 16.73
TOTAL NET PRIOR YEAR ADJUSTMENT $(416,619)
TOTAL SUPPLEMENTAL POWER SALES 781,443 22,626,000 $4,835,337
OTHER ELECTRIC SERVICES INCOME.... $8,433,127
TOTAL POWER INCOME $25,445,970"
-Difference between Total Eleclric Sales and Operating Revem~e ~ due to p05t~closingreconciliation of estimate to actuals between the Authority and Western Area Power Administration.
··Includes Administrative fees, -facilities charges, late charges, and Scheduling Entity revenue.
I~~EPORT OF THE INDEPENDENT ACCOUNTANTS
To the Arizona Power AuthOlity Commission
In our opinion, the accompanying statements of net assets and the related statements of revenues,
expenses, and changes in net assets, and statements of cash flows present fairly, in all material respects,
the financial position of the Arizona Power Authority (the "AuthOlity") (A Body, Corporate and
Politic, of the State of Arizona) at June 30, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of the Authority's
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying management's discussion and analysis is not a required part of the financial
statements but is supplementary information required by the Governmental Accounting Standards
Board. We have applied certain limited procedures, which consisted principally of inquiries of
management regarding the methods of measurement and presentation of the supplementary
infonnatiqn. However, we did not audit the information and express no opinion on it.
~&:~..... t£,...J... ••• ....~.--.- L L~
November 8, 2004
I
=k
MANAGEMENT'S DISCUSSION AND ANALYSIS ~I
The following is a discussion and analysis of the Arizona Power Authority's (Authority) financial perfonnance for the fiscal
year ended June 30, 2004. This discussion is designed to: (a) assist the reader in focusing on significant financial issues,
(b) provide an overview of the Authority's financial activity and (c) identify changes in the Authority's financial position.
The Management's Discussion and Analysis (MD&A) focuses on the current year's activities, resulting changes and known
facts, and should be read in conjunction with the Authority's financial statements beginning on page fourteen.
HIGHLIGHTS
AUTHORITY HIGHLIGHTS
Scheduling Entity Agreement - The Authority and Salt River Project were parties to a Scheduling Entity Agreement,
which expired on September 30,2004. A new Scheduling Entity Agreement provides for Salt River Project (SRP) to pay
the Authority $5.4 million each year in return for allowing Salt River Project to be the Scheduling Entity of the Hoover
generation in Arizona. This Agreement became effective as of October 1, 2004 and expires on September 30, 201l.
The effect of this agreement is that the energy banking program with SRP has been increased, to the advantage of our
customers. However, because payment from SRP has been reduced by $3 million each year, the rates for Hoover power
increased accordingly.
Transmission Agreement - On January 24,2003, the Authority and the Western Area Power Administration (Western)
entered into an agreement for the Advancement of Funds for Transmission Services. The Authority had an existing agreement
with Western that provided for the delivery of power and energy. The agreement provides for the Authority to advance funds
to Western on a monthly basis to fund operations, maintenance and replacement costs associated with Western's transmission
services. For the year ended June 30, 2004, the Authority advanced a net prepaid deposit of $182,360, which is included in
the Statements of Net Assets. This has demonstrated our cooperation and has given our customers greater flexibility in
working with Western.
Arizona State Treasurer-held investment write-off - The Authority is statutorily required to invest funds through the
Arizona State Treasurer (Treasurer), who has sole investment decision-making authority. In November 2002, the Authority
was advised that one of the Treasurer's chosen investments managed by National Century Financial Enterprises was under
investigation for fraud. In December 2002, the Authority was informed that the Treasurer was vitiating the investment in
question, thereby reducing the value to zero. Since that time, litigation was initiated and continues. There is no guarantee
that the litigation will result in the recovery of the Authority's funds, which total $227,224. Therefore, the Authority has
written off the lost investment amount as of June 30, 2003.
Effects of Drought on Hoover Energy - The Colorado River Basin has been experiencing severe drought conditions
for the past five years. This has resulted in a reduction in Lake Mead's storage and the power production at Hoover Dam.
Several Authority customers requested that the Authority purchase supplemental power to offset the reduced energy
production at Hooyer. The supplemental power costs are Significantly higher, and are passed directly to the requesting
customers. These supplemental revenues and costs are reflected on the Authority's books, resulting in higher revenue and
purchased power costs.
1~.0ANAGEMENT'S DISCUSSION AND ANALYSIS
Contributions - During Fiscal Year 2004, the Authority contributed $20,000 via the Arizona Power
Authority Scholarship Program to each of the follOwing schools: the Arizona State University, the University of Arizona,
and Northern Arizona University.
APA Fund - The APA Fund was established by the Arizona Power Authority Commission in 1971 and has grown
Significantly over the years. The APA Fund's Operating Revenues exceeded 2004 Budget by $1,441,450 (or 30%) due to
increased supple mental power sales. Correspondingly, the Fund's Operating Expenses exceeded the budgeted amount by
$1,352,051 (or 27%) due to increased supplemental power purchases.
Other Changes That Will Improve or Provide Future Benefit to the Arizona Power Authority - No other
agreements or new customers were added nor were there any other significant impacting events during the reporting period.
FINANCIAL HIGHLIGHTS
. The Authority's net assets increased by $598,398, or 20 percent, partly due to reduced amount of long-tenn debt
payable associated with the defeasance of the 1993 Bonds in October 2003.
. The Authority's Revenue increased by $432,317, primarily due to an increase in the sale of supplemental power.
The purchase and concomitant sale of additional supplemental power resulted from additional customer energy
requirements brought on by reduced Hoover power generation caused by the sustained drought currently being
experienced throughout the Colorado River Basin. See Authority Highlights, above.
USING THIS ANNUAL REPORT
This annual report consists of a series of financial statements. The Statements of Net Assets, the Statements of Revenues,
Expenses and Changes in Net Assets and the Statements of Cash Flows (on pages 14 - 17, respectively) provide information
about the activities of the Authority as a whole and present a longer-tenn view of the Authority's finances. The Authority is a
body, corporate and politic, of the State of Arizona and is a special-purpose government entity engaged only in business-type
activities. Accordingly, the financial statements presented in this Annual Report are the required basic financial statements in
accordance with the provisions of Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements ­and
Management's Discussion and Analysis -for State and Local Governments.
There are six basic or normal transactions that will affect the comparability of the Statements of Net
Assets summary presentation:
Net Results of Activities - which impact (increase/decrease) current assets and unrestricted net assets.
Borrowing for Capital - which increases assets and long-term debt.
Spending Borrowed Proceeds on New Capital- which reduces current assets and increases capital assets.
There is a second impact, an increase in invested capital assets and an increase in related net debt, which however,
does not change the investment in capital assets, net of debt.
Spending of Non-borrowed Current Assets on New Capital- which (a) reduces current assets and increases
capital assets and (b) reduces unrestricted net assets and increases investment in capital assets, net of debt.
Principal Payment on Debt - which reduces current assets and reduces long-tenn debt. .
Reduction of Capital Assets through Depreciation - which reduces capital assets and investment in capital
assets, net of debt.
M
MANAGEMENT'S DISCUSSION AND ANALYSIS ~I
OVERVIEW OF THE FINANCIAL STATEMENTS
This Discussion and Analysis is an introduction to the basic financial statements of the Authority,
which are comprised of two components.
(1) Fund Financial Statements
(2) Notes to the Financial Statements.
The Fund Financial Statements begin on page14 and provide detailed information about the individual funds. A fund is a
fiscal and accounting entity with a self-balancing set of accounts that the Authority uses to keep track of specific sources of
revenues and disbursements for specific purposes. The Authority's funds are treated as proprietary and are independent of
each other. Most of the Authority's financial dealings are with contracts outside of state government. A separate fund is not
maintained for government activities. The Authority does not act as a fidUCiary.
CONDENSED STATEMENTS OF NET ASSETS
June 30, 2004 June 30, 2003 DiH $ DiH%
Current assets $ 13,045,876 $ 14,952,938 $ (1,907,062) (13%)
Long-term assets 54,296,784 56,666,028 (2,369,244) (4%)
Capital assets 159,403 160,664 (1,261) (1%)
67,502,063 71,779,630 (4,277,567) (6%)
Current liabilities 5,421,283 4,854,228 567,055 12%
Long-term (bonds payable, net) 58,551,481 63,994,501 (5,443,020) (9%)
63,972,764 68,848,729 (4,875,965) (7%)
Net assets
Invested in capital assets 159,403 160,664 (1,261) (1%)
Unrestricted 3,369,896 2,770,237 599,659 22%
Net assets, end ofye~ $ 3,529,299 $ 2,930,901 $ 598,398 20%
CONDENSED STATEMENT OF NET ASSETS DISCUSSION
Current Assets decreased because the Cash with Trustee was used to reduce long-term debt.
Long Term Assets decreased because of the reduction in the cost of the ?urrent year Uprating Program, associated with
debt and other costs related to improvements at Hoover Dam.
Current Liabilities increased primarily due to the increased bonds payable for prinCipal and increased power contracts payable.
Long Term Liabilities decreased due to a change in the investments held by the Trustee, attributable to the Crossover
Refunding of the 1993 Bonds, and the paydown of bond principal.
Net Assets are explained on page 12.
These are the basic or normal transactions that will affect the comparability of the Statements of Changes in the Net Assets
summary presentation.
I I .
III MANAGEMENT'S DISCUSSION AND ANALYSIS
REVENUES
Economic Drought Condition - The sustained drought condition in the Colorado River Basin has resulted
in a decline in power production from Hoover Dam, and this has caused an increase in supplemental power consumption,
and revenues from power sold.
IncreasefDecrease in Commission Approved Power Rates - State statute requires the rates be set at levels to recover
the cost of supplying service. In addition, contracts between the Authority and its customers provide specific details
regarding rate detennination. In addition, by State statute, the Arizona Power Authority's Commission is solely
responsible for periodically modifying rates, as appropriate.
Market Impacts on Investment Income - Market conditions cause investment income to fluctuate in both the long-term
and shorter-tenn venues.
EXPENSES
Introduction of New Programs - Individual programs may be added or deleted to meet changing Authority needs;
however, none has been added during this fiscal year.
IncreasefDecrease in Authorized Personnel - Changes in the Authority's services may result in increasing/decreasing
authorized staffing. Staffing costs (salary and related benefits) represent 3.53 percent of the AuthOrity's operating costs,
and are stable.
Salary Increases (cost of living, merit and market adjustment) - The ability to attract and retain competent personnel
requires the Authority to provide a competitive salary structure, which are reviewed annually.
- MANAGEMENT'S DISCUSSION AND ANALYSIS ~I
The following condensed financial infomlation was derived from the Statements of Revenues, Expenses and Changes in
Net Assets and reflects how the Authority's net assets changed during the fiscal year.
STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS· BUSINESS TYPE ACTIVITIES
June 30, 2004 June 30, 2003 DiffS Diff%
Operating revenues $ 25,445,767 $ 25,013,450 $ 432,317 2%
Operating expenses
Purchased Power 18,014,692 18,048,125 (33,433) (0.2%)
Westem Credits (5,224,715) (5,325,522) 100,807 (2%)
Amortization of Hoover Uprating
Program Costs 5,224,715 5,325,522 (100,807) (2%)
Transmission and Distribution 5,247,155 5,229,802 17,353 0.3%
Administrative and general 1,564,083 1,427,504 136,579 10%
Depreciation 3.5,870 30,711 5,159 17%
Other 102,322 155,357 (53,035) (34%)
Total operating expenses 24,964,122 24,891,499 72,623 .30%
Operating income (loss) 481,645 121,951 359,694 295%
Other (deductions) income
Interest expense (3,209,937) (3,593,036) 383,099 11%
Deferred interest expense 2,735,366 2,958,718 (223,352) (8%)
Amortization 47,177 (82,842) 130,019 157%
Interest income 541,265 627,332 (86,067) (14%)
Other, net 2,882 (225,382) 228,264 101%
Total other (deductions)
income 116,753 (315,210) 431,963 137%
Change in net assets 598,398 (193,259) 791,657 410%
Net Assets, Beginning of Year 2,930,901 3,124,160 (193,259) (6%)
Net Assets, End of Year $ 3,529,299 $ 2,930,901 $ .598,398 20%
CHANGES IN NET ASSETS DISCUSSION
Net Assets increased overall because of the following:
· Operating Revenues and Total Operating Expenses increased because of increased supplemental
power sales. Both of these items are discussed elsewhere in this report.
· Uprating credits decreased because of decreases in debt payments and other costs related to the Uprating Program.
· Amortization of the Uprating Program decreased because of the decrease in interest payments, due to the Crossover
Refunding of the 1993 bonds.
· Administrative and General expenses increased due to increases in personnel costs, occupancy expenses, and
CREDA expenses.
· Depreciation increased because additional capital assets were acquired.
· "Other" Expenses decreased due to the fact that the LGIP loss was recorded as of 6/30/03. This is discussed elsewhere
in the Authority HigWights under the "Arizona State Treasurer - held investment write-off' section..
I~ MANAGEMENT'S DISCUSSION AND ANALYSIS
CAPITAL ASSETS
As of fiscal year end, the Authority had $159,403 invested in
a variety of capital assets, as reflected in the following
schedule, which represents a net decrease (additions less
retirements and depreciation) of $1,261 or one (1) percent
from the end of last year.
June 30, 2003
Distribution Plant
General Plant - Office
June 30, 2004
$ 24,203 $
135,200
$ 159,403 $
32,273
128,391
160,664
The following reconciliation summarizes the change in
Capital Assets, which is presented in detail on page 22
of the Notes to the Financial Statements:
June 30, 2004
Beginning Balance $ 160,664
Additions 34,609
Depreciation (35,870)
Ending Balance $ 159,403
DEBT OUTSTANDING
As of fiscal year-end, the Authority had $60,065,000 in debt outstanding, compared to $67,495,000 last year, as a result of the
defeasance of the 1993 Bonds, including a principal payment of $2,320,000, which was paid on October 1, 2003. Also see
page 23 of the Notes to the Financial Statements for a detailed summary of debt activity during the year.
BUSINESS TYPE ACTIVITIES
The following chart depicts the sources of revenues for the fiscal year.
1- Hoover Power Sales· $20,577,506 (79.17%)
2- Supplemental Power Sales/Administrative Charges· $4,868,261 (18.73%)
3- Interest Income - $541,265 (2.08%)
4- Other Income - $2,882 (0.01 %)
The Authority's revenues from sale of Hoover power may decrease in the coming
year(s) due to drought conditions. Insufficient rain and snow pack results in less water
through the turbines at Hoover Dam, thereby producing less hydroelectric power
available for sale. Additional wet years, and other factors, could help stabilize revenues.
The following chart depicts the types of expenses for the fiscal year.
1- Hoover Purchased Power - $13,179,355 (51.81%)
2- Transmission & Distribution - $5,247,155 (20.63%)
3- Supplemental Power Purchased - $4,835,337 (19.01 %)
4- Administrative & General - $1,564,083 (6.15%)
5- Net Interest Expense - $474,571 (1.87%)
6- Other Costs - $102,322 (0.40%)
7- Depreciation - $35,870 (0.14%)
For further infonnation and/or questions on
this report, please call the Power Authority
Office at 602-542-4263.
g
FINANCiAl STATEMENTS ~I
STATEMENTS OF NET ASSETS
June 30th, 2004 and 2003
APA General Fund Hoover Uprating Fund Total
2004 2003 2004 2003 2004 2003
Assets
Current assets
Cash and cash equivalents $ 3,757,939 $ 3,894,085 $ 2,148,362 $ 2,098,840 $ 5,906,301 $ 5,992,925
Cash with Trustee 2,694,576 2,694,576
Investments held by Trustee 2,653,463 2,592,771 2,653,463 2,592,771
Accounts receivable, customers
power purchases 703,846 235,854 2,136,496 1,950,056 2,840,342 2,185,910
Interest receivable 7,818 10,802 117,562 130,383 125,380 141,185
Prepaid purchased power 1,520,390 1,345,571 1,520,390 1,345,571
Total current assets 4,469,603 4,140,741 8,576,273 10,812,197 13,045,876 14,952,938
Capital assets, net 159,403 160,664 159,403 160,664
Investments held by Trustee 6,546,550 7,146,663 6,546,550 7,146,663
Advances for Hoover Uprating
Program, net 47,567,874 49,337,005 47,567,874 49,337,005
Prepaid transmission 182,360 182,360 182,360 182,360
Total assets $ 4,811,366 $ 4,483,765 $ 62,690,697 $ 67,295,865 $ 67,502,063 $ 71,779,630
Liabilities
Current liabilities
Accounts payable and other $ 12,607 $ 3,830 $ 99,682 $ 107,768 $ 112,289 $ 111,598
Power contracts payable 693,222 232,500 1,298,732 1,296,311 1,991,954 1,528,811
Accrued interest payable 772,040 893,819 772,040 893,819
Bonds payable 2,545,000 2,320,000 2,545,000 2,320,000
Total current liabilities 705,829 236,330 4,715,454 4,617,898 5,421,283 4,854,228
Bonds payable 57,520,000 65,175,000 57,520,000 65,175,000
Premium (discounts) on bonds payable 3,243,535 (1,180,499) 3,243,535 (1,180,499)
Deferred amounts, net (2,212,054) (2,212,054)
Bonds payable, net 58,551,481 63,994,501 58,551,481 63,994,501
Total liabilities $ 705,829 $ 236,330 $ 63,266,935 $ 68,612,399 $ 63,972,764 $ 68,848,729
Net Assets
Net assets
Invested in capital assets $ 159,403 $ 160,664 $ $ $ 159,403 $ 160,664
Unrestricted 3,946,134 4,086,771 (576,238) (1,316,534) 3,36

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Full Text

Diana Clay O'Dell
Legislative Research Analyst
(602) 926-3745
Arizona House of Representatives
House Majority Research
MEMORANDUM
1700 West Washington
Phoerux,~ona85007
F)U((602) 417-3097
To: JOINT LEGISLATIVE AUDIT COMMITTEE
Representative Laura Knaperek, Co-Chair
Senator RobertBlendu, Co-Chair
RE: ARIZONA POWER AUTHORITY - SUNSET REVIEW
Date: December1, 2005
Attached is the final report of the sunset review of the Arizona Power Authority, which was
conducted by the House of Representatives C::Qmmerce .and the Senate Commerce and Economic
Development Committee of Reference. This report has been· distribllted to following
individuals and agencies:
Governor of the State of Arizona
The Honorable Janet Napolitano
Presidentof the Senate
Senator Ken Bennett
Speaker of the House of Representatives
Representative James.P. Weiers
House Members
Representative John McComish,Co-Chair
Representative Bill KOl'")opnicki
Representative Debbie McCun~-Davis
Representative Robert Meza
Repres~ntative Michele Reagan
Senate Members
Senator Barbara. Leff, Co-Chair
Senator Ken Cheuvront
Senator Richard Miranda
Senator Jay Tibshraeny
Senator Jim Waring
Miscellaneous
Arizona Power Authority
Office of the Auditor General
Department of Library, Archives &Public Records
Office of the Chief Clerk and Secretary of the Senate
Senate Republican Staff
Senate Research Staff
Senate Democratic Staff
House Majority Staff
House Research Staff
House Democratic Staff
COMMITTEE OF REFERENCE
Arizona House of Representatives
Committee on Commerce
Arizona State Senate
Committee on Commerce and Economic Development
FINAL REPORT
OF THE
ARIZONA POWER AUTHORITY
DECEMBER
2005
COMMITTEE OF REFERENCE REPORT
House ofRepresentatives Committee on Commerce and
Senate Committee on Commerce and Economic Development
ARIZONA POWER AUTHORITY
To: JOINT LEGISLATIVE AUDIT COMMITTEE
Representative Laura Knaperek, Co-Chair
Senator Robert Blendu, Co-Chair
Date: November 9, 2005
Pursuant to Title 41, Chapter 27, Arizona Revised Statutes, the Committee of Reference, after
perfonning a sunset review and conducting a public hearing, recommends the following:
The Arizona Power Authority be continuedfor ten years.
COMMITTEE OF REFERENCE
sentative John McComish, Co-Chair
)
..-)
.. G~/&C£I
Senator Barbara Leff, C
Z;&
~'
Senatot:iIllWari11g
RepresentativeDe bie McCune-Davis
M(rk ~Uc ee~tl<5=t-La~zb~)--
Representative Michele Reagan
COMMITTEE OF REFERENCE
House ofRepresentatives Committee on Commerce and
Senate Committee on Commerce and Economic Development
Arizona Power Authority
Final Report
I. Background
Pursuant to §41-2953, Arizona Revised Statutes, the Joint Legislative Audit Committee
(JLAC) assigned the sunset review ofthe Arizona Power Authority to the House ofRepresentatives
Commerce and the Senate Commerce and Economic Development Committee ofReference (COR).
[Attachment A]
II. Committee of Reference Sunset Review Procedure
The Committee ofReference held one public hearing on Wednesday, November 9, 2005, to
review the performance audit of the Arizona Power Authority and to receive public testimony.
[Attachment B]
At the public hearing, the Committee heard testimony from the following:
Mr. Joseph W. Mulholland, Executive Director, Arizona Power Authority
Mr. Mulholland provided a Power Point presentation outlining information regarding the
Arizona Power Authority, including the Authority's statutory responsibilities. In addition, Mr.
Mulholland summarized the internal organization and various changes that have taken place in order
for the Authority to function more effectively in the public interest.
The Arizona Power Authority was first established by the 16th Legislature, Second Special
Session in 1944. The original enabling legislation in Title 30, Chapter 1, Arizona Revised Statutes,
outlined the organization, powers and duties ofthe Authority. The stated purpose ofthe Authority
"is to bargain for, take and receive electrical or other forms ofenergy and make these forms of
energy available for the benefit ofthis state.}} Specifically, the Authority's responsibility included
acquiring and marketing the state's allocated share of Hoover Dam (formerly Boulder Dam)
hydroelectric power developed from the waters ofthe main stream ofthe Colorado River. Hoover
Power Plant at Hoover Dam serves as the primary source ofpower and energy for the Authority and
is located about 25 miles from Las Vegas, Nevada.
Additionally, the Legislature enacted Laws 1967, Chapter 10, Arizona Revised Statutes,
which created the Arizona State Water and Power Plan to provide a financing mechanism for the
Central Arizona Project (CAP) through the Authority; however, the project was ultimately
constructed by the federal government. The legislation enabled the construction of several
hydroelectric facilities and later authorized the financing and construction ofArizona's portion ofthe
Hoover Uprating Project at Hoover Dam.
A five-member Arizona Power Authority Commission appointed by the governor and
confirmed by the Senate oversees the Authority. The Authority serves low-cost and dependable
hydroelectric power to Arizona irrigation and electrical districts, cities, and towns. Salt River Project
is one ofthe largest customers next to the Central Arizona Water Conservation District, which is the
operating agent for CAP. Revenue is derived from the sale ofhydroelectric power and transmission
service to more than 30 wholesalers. Using its financing capabilities authorized by the State Water
and Power Plan, the Authority issued tax exempt revenue bonds in excess of$90 million to fund the
Hoover Uprating Project. Approximately $57.5 million remains unpaid.
Laws 1996, Chapter 10, permits the termination ofthe Arizona Power Authority only ifthere
are no outstanding contractual obligations, debts, or other financial obligations related to the Hoover
Power Plant Modifications or Hoover Power Plan Uprating Project.
III. Committee Recommendations
The Committee of Reference recommends the Arizona Power Authority be continued ten
years.
IV. Statutory Report Pursuant to Section 41-2954, Arizona Revised Statutes
[Attachment C]
V. Attachments
A. Meeting Notice
B. Minutes of Committee of Reference Hearing
C. Report by Arizona Power Authority
- Final Report
Page2
Attachment A
Interim agendas can be obtained via the Internet at http://www.azleg.state.az.usllnterimCommittees.asp
ARIZONA STATE LEGISLATURE
INTERIM MEETING NOTICE
OPEN TO THE PUBLIC
SENATE COMMERCE AND ECONOMIC DEVELOPMENT AND HOUSE OF
REPRESENTATIVES COMMERCE COMMITTEE OF REFERENCE
FOR THE SUNSET REVIEW OF:
INDUSTRIAL COMMISSION OF ARIZONA,
BOILER ADVISORY BOARD
EMPLOYMENT ADVISORY COUNCIL
OCCUPATIONAL SAFETY AND HEALTH ADVISORY COMMITTEE
OCCUPATIONAL SAFETY AND HEALTH REVIEW BOARD
ARIZONA STATE BOARD OF TECHNICAL REGISTRATION
ARIZONA POWER AUTHORITY
Date:
Time:
Place:
Wednesday, November 9, 2005
8:30 a.m.
House Hearing Room 3
AGENDA
1. Call to Order
2. Opening Remarks
3. Presentation of Performance Audits:
Larry Etchechury, Executive Director, Industrial Commission of Arizona
• Industrial Commission of Arizona
• Boiler Advisory Board
• Employment Advisory Council
• Occupational Safety and Health Advisory Committee
Diana Clay O'Dell, Research Analyst, House Committee on Commerce
• Occupational Safety and Health Review Board
4. Public Testimony
5. Discussion
6. Recommendations by the Committee of Reference
7. Presentation of Performance Audit
Ronald W. Dalrymple, Executive Director, Board of Technical Registration
• Arizona State Board of Technical Registration
8. Public Testimony
9. Discussion
10. Recommendations by the Committee of Reference
11. Presentation of Performance Audit
Joseph W. Mulholland, Executive Director, Arizona Power Authority
• Arizona Power Authority
12. Public Testimony
13. Discussion
14. Recommendations by the Committee of Reference
15. Adjourn
Members:
Senator Barbara Leff, Co-Chair
Senator Ken Cheuvront
Senator Richard Miranda
Senator Jay Tibshraeny
Senator Jim Waring
10/24/05
jmb
Representative John McComish, Co-Chair
Representative Bill Konopnicki
Representative Debbie McCune Davis
Representative Robert Meza
Representative Michele Reagan
People with disabilities may request reasonable accommodations such as interpreters, alternative
formats, or assistance with physical accessibility. If you require accommodations, please contact the
Chief Clerk's Office at (602) 926-3032, TOO (602) 926-3241.
Attachment B
ARIZONA STATE LEGISLATURE
Forty-seventh Legislature - First Regular Session
SENATE COMMERCE AND ECONOMIC DEVELOPMENT AND HOUSE OF
REPRESENTATIVES COMMERCE COMMITTEE OF REFERENCE
FOR THE SUNSET REVIEW OF
INDUSTRIAL COMMISSION OF ARIZONA
BOILER ADVISORY BOARD
EMPLOYMENT ADVISORY COUNCIL
OCCUPATIONAL SAFETY AND HEALTH ADVISORY COMMITTEE
OCCUPATIONAL SAFETY AND HEALTH REVIEW BOARD
ARIZONA STATE BOARD OF TECHNICAL REGISTRATION
ARIZONA POWER AUTHORITY
Minutes of Meeting
VVednesday,~ovember9,2005
House Hearing Room 3 -- 8:30 a.m.
Chairman McComish called the meeting to order at 8:40 a.m. and roll call was taken by the
secretary.
Members Present
Senator Cheuvront
Senator Tibshraeny
Senator VVaring
Senator Leff, Cochair
Senator Miranda
Members Absent
Speakers Present
Representative Konopnicki
Representative McCune Davis
Representative Meza
Representative Reagan
Representative McComish, Cochair
Larry Etchechury, Director, Industrial Commission of Arizona
Laura McGrory, Chief Counsel, Industrial Commission of Arizona
Diana Clay O'Dell, House Majority Research Analyst, Commerce Committee
Willie Johnson, representing self
Ronald Dalrymple, Executive Director, Arizona State Board of Technical Registration
Canan D'Avela, representing self
Joseph Mulholland, Executive Director, Arizona Power Authority
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
OF THE INDUSTRIAL COMMISSION OF ARIZONA, ETC.
November 9, 2005
Industrial Commission of Arizona
Larry Etchechury, Director, Industrial Commission of Arizona (lCA), said he believes the ICA is
efficient and effective in fulfilling its statutory responsibilities. The ICA was established in 1925
to implement the constitutional provisions creating the worker's compensation system in
Arizona. The duties of the agency have been expanded over time to include occupational safety
and health issues, regulation of child labor, resolution of wage disputes, vocational rehabilitation
for injured workers, and other activities. The ICA has 313 employees, an operating budget of
approximately $17.7 million, and is funded by a three percent tax on worker's compensation
premiums. The policy-setting body is a five-member commission appointed by the Governor
and confirmed by the Senate. The members serve five-year staggered terms.
Mr. Etchechury related that the agency has four major focuses, three of which are regulatory in
nature, and the fourth is almost an insurance function. He reviewed the responsibilities of the
Claims Division and the Administrative Law Judge (ALl) Division, noting that the average time
to adjudicate a case in 2005 was 118 days. There is a significant amount of concern that the time
frame should be less. Trying to accommodate the schedules of physicians, in particular, to make
live testimony is extremely difficult, and in some cases, may not be necessary, so the agency is
working with the attorney community about being more selective as to when and where a
doctor's testimony is needed as opposed to written reports. He provided an overview of the
Arizona Division of Occupational Safety and Health (ADOSH), which involves the Compliance
Program, the Consultation/Training Program and the Boiler and Elevator Programs (Evaluation
Report from the U.S. Department of Labor from October 1, 2003 through September 30, 2004,
Attachment 1).
He related that the Commission has an Occupational Safety and Health Advisory Committee, an
Elevator Advisory Board, a Boiler Advisory Board, and an Employment Advisory Committee,
which are typically composed of industry representatives, both labor and management, to assist
in adopting standards. The Occupational Safety and Health Advisory Committee is appointed by
the ICA, and in addition to assisting in adoption of standards, provides input to the Governor's
Office for appointments to the Occupational Safety and Health Administration (OSHA) Review
Board. The Committee can also be used in other areas. For example, several years ago, fatalities
occurred involving excavations, so the Occupational Safety and Health Advisory Committee
helped develop a comprehensive program that eradicated fatalities for about a five-year period.
Mr. Etchechury reviewed the responsibilities of the Labor Department in relation to wage
disputes, youth employment laws, licensing of employee paid employment agencies, and the
Employment Advisory Council whose members are appointed by the ICA for three-year terms.
The Employment Advisory Council reviews new or existing licensees and advises the ICA on
matters involving employment agencies. A number of years ago a request was made to the
Legislature to delete this function from the ICA's jurisdiction, but the industry testified as to the
benefits of the Council as a regulated element. In reviewing jurisdictions in other states, much
fraud was found, particularly in career counseling and some employment agencies, so the
Legislature decided to retain the Council as part of the jurisdiction of the ICA, which has
prevented fraud from occurring in Arizona.
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AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
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2 November 9, 2005
Mr. Etchechury said the fifth function is the Special Fund, which consists of about $280 million,
to provide insurance for uninsured claimants and continue worker's compensation benefits for
claimants of insolvent carriers and insolvent self-insured employers. In 2001, the Special Fund
had an $80 million surplus, but now there is a $190 million deficit because about 16 insurance
companies became insolvent from 2001 to 2005. Last year, the Legislature provided the
authority to revert excess monies from the Administrative Fund to the Special Fund at the end of
the year, which provided a cushion to meet annualized expenses; however, it is not known how
much insolvency may occur in the future. He noted that the Arizona Department of Insurance
(DOl) has deposits on file for insurance carriers regarding liabilities, but those deposits are not
sufficient; however, if the deposits were not on file, as in most states, the deficit would be much
larger. The ICA is working with DOl on that issue. He added that the Special Fund also shares
the responsibility with insurance carriers or self-insured employers for a portion of liabilities for
certain loss of earning capacity awards, provides vocational rehabilitation benefits, and provides
continuing medical benefits for pre-1973 worker's compensation claims. (For more details see
Attachment 2).
He advised Senator Leff that the Special Fund is funded by a 2.5 percent assessment against
employers, which is the maximum amount and became effective in 2004. He indicated that he
does not desire to increase the assessment.
Mrs. McCune Davis asked if the insolvencies are a backlash to what happened in California.
. Mr. Etchechury responded that a few elements took place. In the early 1990s, everyone
recognized that all kinds of money could be made in the market. Insurance carriers marketed to
get business and let down some protections. Suddenly, the market began tightening up and
reversals started to take place. At that point, people were in the system that were at much larger
risk and not paying those risks. For example, Reliance Insurance Company reported three
quarters of a billion dollar loss in the third quarter of operations, and at the same time, asked DOl
for a deviation from the insurance rates.
He advised Senator Leff that the penalty for a company that does not carry workmen's
compensation insurance ranges from $1,000 to $10,000, and depending upon the repetitiveness,
the ICA can go to Superior Court and obtain an injunction to keep the company from operating.
Collecting the money is difficult because many times companies declare bankruptcy and go
through the federal bankruptcy process, which is extremely difficult and onerous. The collection
rate is about 20 percent. If the ICA finds that a company declared bankruptcy and has not paid
the penalty, the injunctive process is used whereby a superior court judge rules that the company
cannot operate or the owner will be sent to jail. Unfortunately, some companies are probably
still in operation that the ICA is not aware of because when bankruptcy is declared, the owner
can change the name of the company and start again.
When Mr. Konopnicki asked for further details about the increase in insolvencies,
Mr. Etchechury related that from 1970 to 2001 the Special Fund had about 350 open claims.
From 2001 to the present there are in excess of 1,200 open claims. When an insurance carrier
obtains a license, financial reports are filed with DOl, and based on those reports, a deposit is
made with DOl that is supposed to be sufficient to cover potential liabilities. In reality, the
deposits were not adequate by about 50 percent.
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
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3 November 9, 2005
Mr. Etchechury explained that as an example, the domicile insurance carrier in California knew
the Freemont Insurance Company was in trouble long before bankruptcy was declared, so the
company was under a restitution process to resolve problems. In the process, their companies
were consolidated into one company, and DOl had deposits for each of the companies. The
domiciliary said any assets associated with the companies must be given to the domiciliary for
that one company. DOl must have good reason to keep the deposits and did not because the
outcome is not known, so the domiciliary can legally do that. The ICA then calculated what the
deposit would be for the one company, which, in reality, would be the same, but in this particular
case, it was not, so there was a major hit to the Special Fund. Other elements were also
involved, but he was told that DOl did everything possible to sustain the deposits.
Mr. Konopnicki said he would like the name of the person involved from DOL
Laura McGrory, Chief Counsel, Industrial Commission of Arizona, agreed that carriers are
required to make a deposit with DOL Carriers file an annual financial statement with DOl on an
annual basis and fill out a form regarding prior losses, premiums written, and reinsurance credits.
There is a present value discount, but the formula calculates a number that becomes the statutory
deposit. The statute says what is required to be posted, so if the number is lower according to the
formula, DOl may be required to return some deposit money to align with the formula. In the
Freeman scenario, a merger occurred and the companies, which mayor may not have been in
conjunction with the domiciliary because they were in some type of receivership, indicated to
DOl that they came up with a lower number so DOl was holding excess deposit money that
should be returned. An enormous amount of dialogue went on between DOl and California, but
ultimately, the deposit money was returned. There were some difficulties afterward with the
nature of the security DOl accepted, which essentially declined in value. It was some type of
Fannie Mae mortgage-based security, so the Special Fund is left with a deficiency as the
liabilities are higher than the deposit.
Senator Leff submitted that the deposit then is meaningless. Ms. McGrory answered that when
an insurance company sees the writing on the wall, an attempt is made to marshal assets in order
to have as much money as possible to facilitate the process of drawing things down, so DOl
frequently receives requests for release of deposit money. When DOl knows a company is in
trouble, everything possible is done to hold on to the money. There is a current situation in
which an insurance carrier is headed for insolvency and the carrier and domiciliary are asking for
money to help the company. DOl has worked hard to retain the deposit by having an actuarial
analysis to justify the numbers. Because of what happened in the past, more dialogue goes on
between DOl and the ICA. DOl no longer releases deposit money without asking the ICA if
there is a problem.
Senator Leff then questioned the purpose of the deposit. Ms. McGrory agreed that is a concern,
noting that the ICA is reviewing ways to strengthen the ability to keep deposit money or increase
the deposits. Multiple things are occurring with credits for reinsurance and a present value
discount of six percent, so elements are decreasing the deposit.
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
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4 November 9,2005
Senator Leff asked if credit for reinsurance goes away since the money is supposed to be there to
reinsure the money. Ms. McGrory replied that the benefits of reinsurance are not necessarily
realized when a carrier goes into liquidation because reinsurance deposits are considered an asset
of the estate. Although the deposit decreases because of the credit for reinsurance, the liquidator
marshals the reinsurance proceeds, and to the extent the proceeds are recovered,· a pro-rata
distribution is made amongst creditors, so there is not a dollar-for-dollar benefit from the
reinsurance posting.
Senator Leff noted that good employers are paying the maximum 2.5 percent assessment, partly
because of this and wondered why the employer community is not upset about what the
reinsurance community is doing. Mr. Etchechury responded that the lCA supported legislation
dealing with different elements, but even though the employer community was aware, there was
no involvement on their part.
Mr. Konopnicki said as an employer in Arizona he did not know about the situation, which is a
major problem. He recommended referring the matter to the Attorney General. Mr. Etchechury
indicated that employer representative organizations, such as the Chamber of Commerce, the
National Federation ofIndependent Business and others, were made aware, but he does not know
what was done with the information. He submitted that it is easy to say all that has to be done is
change the formula and make sure deposits are adequate; however, if that were done right now,
there may be insurance companies on the brink of disaster, so asking for an increase in deposits
by 50 percent could potentially create additional insolvencies.
Senator Leff suggested retaining the amount rather than increasing the deposit. Mr. Etchechury
responded that would not entirely solve the problem. What happened with the Freemont
Insurance Company is one particular situation, but there are other companies like Reliance
Insurance Company where the deposit was inadequate. Multiple issues created the problem,
such as large deductibles. For example, an employer may want a large deductible policy for
$1 million and the premium is calculated accordingly. When the deposit is calculated, the
$1 million is not considered in terms of liability, which would be counted beyond the $1 million.
Therefore, when the whole house of cards goes down there is the potential not only for liability
of the insurance, but also, the large deductible employer. An entity has been created that is not
even addressed in statute. A number of large deductible employers currently not identified are
acting as self-insured employers with no oversight whatsoever in terms of processing claims,
which was created with the insolvency debacle. He said the agency is becoming involved in
insurance law when it previously was not.
Mrs. McCune Davis asked if DOl and the lCA are notified when a company is going into
receivership and questioned if tools are in place to freeze deposits. She wondered if action is
being taken or legislation is needed to protect existing assets. Mr. Etchechury replied that
legislation was introduced to codify insolvency processes at DOl that were normally accepted,
but were challenged by others not necessarily involved in the process. That has helped, but there
is more to be done. The agency is working closely with DOl to address some issues, but it is
very complex.
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
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5 November 9, 2005
Senator Leff remarked that she understands the deficit is over the lifetime payment and
wondered if the fund can be brought back into balance. Mr. Etchechury said he hopes so,
without affecting the principle in terms of existing investments. ICA is able to meet annualized
expenditures. In the long term, he hopes to resolve the issue so this does not reoccur, but the
number of potential insolvencies is not known.
Senator Leff commented that is why it was so important to some legislators not to privatize the
State Compensation Fund, which probably would have been severely diminished.
Mr. Etchechury acknowledged that the State Compensation Fund is a key element of the
worker's compensation system.
Mr. Konopnicki contended that major problems exist, not of the ICA's making, but due to
legislation and DOl. It is the responsibility of the Committee to offer legislation to solve these
problems, but he is hesitant to recommend a IO-year extension of the agency. Senator Leff
submitted that legislation should be introduced to address the problems, but there is no reason
not to extend the agency for 10 years.
Mr. Etchechury related to Chairman McComish that funding from the three percent tax paid by
employers is adequate. Currently, 2.5 percent is used to fund the agency and the additional one­half
percent is administrative money that goes into the Special Fund to meet annualized
expenditures. If the Special Fund becomes fiscally sound, the rate can only be sufficient to fund
the agency, so it is a floating rate on the administrative side, and any extra goes into the Special
Fund.
Chairman McComish asked if employer paid agencies are licensed. Mr. Etchechury replied that
those were taken out of the statute several years ago and are no longer licensed. There have not
been any problems associated with employer paid agencies because the market dictates;
therefore, he does not believe regulation is necessary.
Mrs. McCune Davis noted that fines charged to employers as the result of accidents that occur in
the workplace go into the General Fund and questioned if adequate money is available for safety
programs or some of that money should be directed for that purpose. Mr. Etchechury responded
that the question arises periodically in the Legislature. The money could be used to enhance
safety and health programs, but it is up to the Legislature. There have been some efforts,
including providing bilingual health and safety training programs.
Diana Clay O'Dell, House Majority Research Analyst, Commerce Committee, advised that the
purpose of the OSHA Review Board is to hear administrative appeals regarding orders of the
Industrial Commission's Arizona Division of Occupational Safety and Health (ADOSH). This
forum provides a final appeals step in the administrative law process before filing with the Court
of Appeals. The OSHA Review Board consists of five members appointed by the Governor to
five-year terms. Current law mandates one representative of management, one of labor and three
public members. The OSHA Review Board operates with only a contract employee who is an
attorney. Following discussions with the Governor's Regulatory Review Council (GRRC) prior
to the OSHA Review Board's routine five-year rule-making process, the OSHA Review Board
discovered that it does not have the statutory rule-making authority necessary to adopt rules;
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
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6 November 9, 2005
therefore, the rule-making authority will be sought through future ICA legislation. The OSHA
Review Board historically meets every quarter; however, since more cases are now mediated
before going to a formal hearing, only one meeting was held in the past two years. A meeting
will be held on November 30, 2005.
Chairman McComish related that Lisa Gervase, the contract attorney for the OSHA Review
Board, could not attend the meeting (for more details about the OSHA Review Board, see Letter
from Ms. Gervase, Attachment 3).
Senator Leff questioned why the Board has separate review authority. Ms. O'Dell responded
that ALJs under the authority of the ICA make the initial decision, so these are appeals to a
separate independent review board to avoid a conflict of interest.
Senator Leff stated that in working with the Registrar of Contractors a constituent was heard by a
second judge for an appeal, not an ALI. Mr. Etchechury replied that the OSHA Review Board
was created to mirror the appeals process at the federal level through an OSHA Review Board
that is totally separate from the U.S. Department of Labor. During creation of the OSHA
Review Board on a local level, the Legislature and Governor's Office wanted a mechanism
whereby an employer could go before a lay board without incurring the expense of hiring an
attorney. An rCA ALJ makes the initial determination, which can be appealed to the OSHA
Review Board, then the Court of Appeals and Supreme Court. He understands the Registrar of
Contractors uses the hearing division set up by the Legislature as part of the appeals mechanism,
but he is not sure if the Registrar of Contractors can overrule that decision.
Senator Leff said the Registrar of Contractors can overrule the decision, so the constituent went
back for another hearing. Mr. Etchechury indicated that the ICA does not have that. The appeals
process should be separate from the ICA because a determination is already made at a divisional
level in terms of ADOSH and an ALJ, so this is a separate appeals process that should be
separate.
Chairman McComish said it sounds like ICA does a good job providing mediation, so perhaps
there is less need for the OSHA Review Board today then when it was created. Mr. Etchechury
responded that is possible as the number of cases heard is minimal, i.e., one case in the last two
years and one case is currently pending. The Review Board is funded from a non-reverting
General Fund account. This means there is a certain amount of funding, but no appropriation for
the next two years, so expenditures for the contract attorney will only be with respect to that one
case and will not be monumental. He indicated to Senator Leff that he believes the
OSHA Review Board should be continued.
Ms. O'Dell advised Senator Leff that the procedural rule in place related to what needs to be
done to file paperwork. When the agency was told there is no specific statutory authority for
rule-making, the decision was made to allow the procedure to repeal, seek statutory authority,
and reinstate the rule.
Willie Johnson, representing self, testified that his son, Daryl Wayne Johnson, was killed on
October 28, 2003 while working in the warehouse at Accurate Cargo Delivery when the forklift
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
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7 November 9, 2005
he was operating fell on top of him crushing his chest. While Mr. Johnson was in the emergency
room of St. Joseph's Hospital, no one from the company arrived to console the family or check
on his son's condition. During the field investigation that same day by the investigator from
OSHA, the owner was only concerned about the possibility of being sued. The OSHA
investigator interviewed a few employees, one of which indicated that the owner brags about
making $250,000 per year, but cannot provide safety training for employees.
Mr. Johnson stated that another accident involving a forklift occurred on January 2002 that was
not reported to OSHA, but the individual involved wrote a sworn document to OSHA concerning
the incident. The individual indicated that no forklift training was ever provided and his
supervisor told him to drive the forklift faster. About an hour after the incident occurred, the
owner and general manager showed up and asked the individual if he was okay. The individual
said he was, so the owner and general manager left, but the individual was not told to go to the
emergency room to be checked. The person stated in the report that the company does not
believe in safety, hires young inexperienced warehouse men, and pays the workers a low salary.
Mr. Johnson stated that while going through the procedure with OSHA and State Compensation,
he tried to obtain a professional opinion on how to hold the owner accountable. He was advised
by counsel that the ICA covers that and there is nothing that can be done. Many employees who
worked for the company told him the company does not care about employee safety. He gave
the information to OSHA, and as time went on, found that several violations were issued to the
company totaling $35,000. He personally thought some incidents should have been willful, but
OSHA did not. The penalty was eventually reduced to $21,000 because the company agreed to
pay, but he does not know if the penalty was paid. He recommended that any time a hearing is
held to negotiate a settlement offer or plea agreement for a company that is negligent resulting in
a serious injury or loss of life, the family should be allowed to attend hearings and voice opinions
instead of being shut out. He would also like to see the procedures changed so fines are levied
without reductions.
Mrs. McCune Davis conveyed that she asked Mr. Johnson to testify. She expressed concern that
sometimes it is more expeditious for employers not to follow safety rules, and unless fines are at
an appropriate rate, some employers would rather pay the fines and not follow safety rules. This
young man with a promising future is the reason the rules were implemented. She added that she
attended a press conference the day before on the west side about two young men killed at a
Subway facility. The employer was present and paid for the funerals, which is quite a contrast.
Senator Leff asked if a company can be shut down or something for negligence as opposed to a
monetary penalty. Mr. Etchechury replied that in this particular case, an investigator looked at
every allegation that was made and found serious violations. For willful or repeat violations
where it appears there are egregious elements, cases can be referred to the Attorney General's
Office for prosecution.
Senator Leff noted that someone was harmed at Accurate Cargo Delivery in a similar accident
and wondered why that was not considered. Mr. Etchechury said in that incident the forklift
operator was backing out of a semi onto the loading dock. The driver of the semi did not realize
someone was in the truck and drove away from the dock, so the forklift fell off the truck down
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
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8 November 9, 2005
below the dock. The circumstances were different. Violations were found and the employer did
not have an effective safety and health program or the citations would not have been issued.
There is typically a 25 percent reduction in the penalty to expedite the settlement process and
close the citation. He pointed out that Arizona statute allows a $25,000 penalty to be paid by the
employer to the family (widow and any individuals solely dependent upon the person injured),
which the Committee may want to extend or expand to cover serious violations.
Mr. Etchechury indicated to Senator Waring that a willful violation occurred in Yuma where
individuals were prosecuted. Employees were entering a sewer system. The company had been
instructed on provisions to follow to make sure the air was clean and breathable, but did not
follow-up, and two individuals died. The case was referred to the Attorney General's Office
where criminal negligence was found on the part of the employer. In another situation, a student
attending the University of Arizona on a wrestling scholarship was working for the summer for a
contractor on an excavation. An Arizona Public Service employee working in an adjacent area
told the foreman that people cannot go into the cut without adequate protection and shoring in
place. "The contractor continued to work and the excavation caved in killing the individual. That
was considered a willful violation so there was a criminal indictment. He clarified that if there is
a follow-up investigation and the safety rules were ignored by supervision, even though no injury
occurred, it would be considered a willful violation and a fine of $70,000 would be assessed.
Ms. Reagan asked if there is some type of follow-up on violations. Mr. Etchechury responded
that every serious violation is followed up through periodic visits, which is required by statute.
Prosecution" of cases only occurs for willful and repeat violations, not serious violations, which
could be included.
He advised Senator Leff that violations were issued to Accurate Cargo Delivery because of lack
of safety training, speeding and no supervision on the part of the employer to prohibit speeding,
propane canisters on the vehicle were not adequately secured, and the seat belt issue.
Senator Leff moved that the Committee of Reference recommend to the
Legislature that the Industrial Commission be continued for 10 years. The
motion carried by a roll call vote of 9-0-0-1 (Attachment 4).
Senator Leff moved that the Committee of Reference recommend to the
Legislature that the Boiler Advisory Board be continued for 10 years. The
motion carried by a roll call vote of 9-0-0-1 (Attachment 5).
Senator Leff moved that the Committee of Reference recommend to the
Legislature that the Employment Advisory Council be continued for
10 years. The motion carried by a roll call vote of 9-0-0-1 (Attachment 6).
Senator Leff moved that the Committee of Reference recommend to the
Legislature that the Occupational Safety and Health Advisory Committee be
continued for 10 years. The motion carried by a roll call vote of 9-0-0-1
(Attachment 7).
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
OF THE INDUSTRIAL COMMISSION OF ARIZONA, ETC.
9 November 9, 2005
Senator Leff moved that the Committee of Reference recommend to the
Legislature. that the Occupational Safety and Health Review Board be
continued for 10 years. The motion carried by a roll call vote of 9-0-0-1
(Attachment 8).
Arizona State Board of Technical Registration
Ronald Dalrymple, Executive Director, Arizona State Board of Technical Registration, said the
Board regulates nine different practices. As of this week, there are 21,895 licensees ranging
from engineers (60 percent of the registered population), architects (23 percent), land surveyors
(8 percent), landscape architects (2 percent), geologists (3 percent), home inspectors (4 percent),
certified drug laboratory site remediation supervisors and workers (1.2 percent) and assayers
(1/10 of 1 percent) (For more details, see Attachments 9 and 10).
He infonned the Members that the Arizona Department of Environmental Quality (ADEQ)
recently repealed the rule covering the Certified Remediation Specialist Program that was
developed in 2001 by ADEQ as part of the Greenfields Program, which created a new category
of registration for certified remediation specialists. Ten people are in the program and the rule
goes into effect in 2008, so perhaps the Legislature should consider modifying the Board's
statutes to eliminate regulation of certified remediation specialists. He indicated to Senator Leff
that he agrees with ADEQ. It is an ADEQ program, and apparently, during the four years of
existence there has not been a project where a certified remediation specialist was used.
Mr. Dalrymple reported that there are 32 registered assayers in the state and Arizona is the only
state that regulates the profession. The assayer examination needs to be revised, which would
probably cost about $30,000. Every time a sunset occurs by the Auditor General's Office, the
question arises as to whether the agency should continue to regulate assayers. He predicted some
problems if the regulation continues because the agency is trying to develop programs that are
self-sufficient, since there is such a diverse group of professions, so if one is taken out of the
loop there is no negative impact on the agency or others. He advised Senator Leff that assayers
were originally regulated primarily because of mining activity in Arizona.
Referring to Page 6 of the handout (Attachment 9), Chairman McComish noted that the number
of days for complaint resolution increased in the last few years. Mr. Dalrymple responded that
investigators make between $28,000 and $30,000 per year, and in the main investigative body
there are five investigators, including the manager. The agency generally ends up hiring
younger, less experienced investigators or older retired police officers or other individuals. After
receiving training and having two or three years of experience, the younger people leave for
larger agencies with more money in the budget for investigative salaries. The more experienced
investigators move after a short period of time to the Arizona Department of Corrections, the
Department of Racing, etc., since many are former police officers and find the work dull. The
only investigator with a lot of experience is the manager with 15 years, and the next is three
years. Because of training time to bring new investigators up to speed, the work falls behind.
Mr. Dalrymple indicated to Chairman McComish that he would like more money for
investigators so employees' can be retained. The number of investigators is sufficient and the
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
OF THE INDUSTRIAL COMMISSION OF ARIZONA, ETC.
10 November 9, 2005
workload can be handled once the investigators get up to speed. Investigations take about
25 hours, but two investigators are currently being trained by the investigation supervisor.
Mr. Dalrymple advised Senator Leff that the Board is a 90-10 agency and self-supporting.
Sufficient money is provided from fees, but the Legislature is keeping more than 10 percent,
which happens with many 90-10 agencies. He advised Chairman McComish that the Board has
19 authorized FTEs and 18 are filled, but one is being interviewed this week. Turnover in the
agency is 34 percent. He clarified that the 10 certified remediation specialists are licensed
engineers, geologists or chemists, so those individuals would continue their present jobs and
would not be impacted by eliminating the regulation.
Canan D'Avela, representing self, revealed that he is one of the few registered assayers in the
state. Virtually everything assayers do is behind the scenes, but the work generally involves
things upon which some operations in the U.S. are based. For example, in a recent request for an
investigation, he coordinated with the U.S. Mint Headquarters Office and Fort Knox Office on
certain information that needed to be confirmed or denied. He does work nationally and
internationally on the basis of metals, commodities, precious metals and other materials not
normally heard about, some that are somewhat exotic and used by the National Aeronautics and
Space Administration. Assayers are basically analytical chemists who test ores and minerals to
determine the value and composition.
He related to Senator Leff that because Arizona is the only state that regulates the field, other
states, national organizations and international companies ask assayers in the state for
assumptions. If the regulation is removed, the basis of those standards would be eliminated. He
advised that assayers write the examination, which is sent to a psychometrician who specializes
in psychology examination writing to make sure the format is acceptable to the standards for test
procedures.
Mr. Dalrymple related that much study was done on licensure examinations in the past 15 years.
Psychometric standards were adopted for examinations because if someone fails and is denied a
license, it may be necessary to defend the failure of that person. It costs about $20,000 to
$30,000 to write an examination. The assayer examination has not been reviewed since 2000, so
it is time for a review. Information may change depending on developments in the field. For
example, Mr. D'Avela said assayers are analytical chemists, so the examination may need to be
expanded to encompass chemical analyst activities. The purpose of reviewing examinations is to
ensure that the examination is current, asks the right questions, and whether it is the proper basis
for denying or granting someone a license to practice. The agency has never been sued and is
trying hard not to be sued. The problem is that only one assayer has been licensed in the last five
years.
Chairman McComish pointed out the statement on Page 8 of the handout (Attachment 9) that
certification of assayers would be a more appropriate level of regulation than the current
registration program. Mr. Dalrymple responded that in many cases, certification programs are
developed where there is no examination, but instead, education, prior experience and personal
references are taken into consideration. It is not given quite the same weight as a license, but it
is a method for a state to restrict people who can practice in a field to those who meet certain
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
OF THE INDUSTRIAL COMMISSION OF ARIZONA, ETC.
11 November 9,2005
criteria. The practice is similar to how professional societies certify members and it is a lesser
form of regulation. He indicated to Senator Leff that some national companies may come to
Arizona to use a licensed assayer, but there is probably much activity in other states where
assayers do the work without a license.
(Letters in favor of continuation of the agency from the National Association of State Boards of
Geology [Attachment 10], American Society of Home Inspectors [Attachment 11], Arizona
Home Inspectors Coalition [Attachment 12], and the Chairperson of the Home Inspector Rules
and Standards Committee for the State Board of Technical Registration [Attachment 13]).
Senator Leff moved that the Committee of Reference recommend to the
Legislature that the State Board of Technical Registration be continued for
10 years. The motion carried by a roll call vote of 8-0-0-2 (Attachment 14).
Arizona Power Authority
Joseph Mulholland, Executive Director, Arizona Power Authority, gave a slide presentation
explaining that the Authority was established by the Legislature in 1944 to acquire and market
Hoover power and other renewable resources on behalf of the state. Five commissioners are
appointed by the Governor to serve six-year non-concurrent terms, and those individuals have
extensive experience in Arizona power, water and agricultural issues. The Authority purchases
377,000 kilowatts of power and approximately 1 billion kilowatt hours of energy generated at
Hoover Dam under contracts with the federal government that terminate in 2017, and purchases
transmission service from the federal government to bring power from Hoover Dam to load
centers, primarily in the Phoenix area.
He stated that Hoover generators were overhauled and uprated in 1987. The Authority paid its
share of the uprating with $90 million in revenue bonds that extend through 2017. There is
$55 million outstanding with an average interest rate of 3.5 percent. In addition to the contracts
with the federal government, the Authority has power sales contracts through 2017 for sale of
Hoover power to 30 customers and a scheduling entity agreement with Salt River Project (SRP)
through 2011 to receive power from Hoover Dam to deliver to customers. The Authority is
currently preparing a Wind-Hydropower Integration Feasibility Study for the National
Renewable Energy Laboratory.
Mr. Mulholland indicated that the Authority is coordinating with the Energy Office to implement
the Governor's Executive Order whereby all new state-funded buildings constructed after
February 11, 2005 must derive at least 10 percent of energy from renewable resources, comply
with state energy efficiency standards, and meet or exceed "silver" Leadership in Energy and
Environmental Design standards (Copy of Slide Presentation, Attachment 15). He noted that the
Members were provided with copies of the Authority's 46th Annual Report (Attachment 16) and
-Response to Sunset Review Inquiries (Attachment 17).
Senator Leff noted that a bill was passed several years ago stating that all boards, commissions
and agencies can no longer prepare and distribute fancy annual reports, but instead, make the
information available on the Internet. Mr. Mulholland responded that the Authority's bonds are
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
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12 November 9,2005
rated by national rating agencies. The Annual Reports are primarily sent to bondholders and
people that buy the bonds, and it costs $19,000 to produce the report.
Senator Cheuvront asked the life span of hydroelectric facilities. Mr. Mulholland replied that
hydroelectric facilities last much longer than fossil and nuclear-type plants where the life
expectancy is 30 to 40 years, and then technology is outdated. Hoover Dam is upgraded and
modified continually, so the project is a very important part of the power program in the
southwestern U.S. Barring some tragedy, the life span is probably hundreds of years.
Chairman McComish asked how much of the total power in Arizona is generated by the
Authority. Mr. Mulholland answered that the total is about 12,000 megawatts and the Authority
generates about 400, so 24 percent. What makes Hoover power so valuable is that it is a peaking
resource, unlike Palo Verde units, which run all the time. The Hoover unit runs only during
peaks and can accelerate very quickly because it only involves putting water through the unit.
Accelerating with a fossil unit or even a gas turbine is like accelerating with a car where there is
much wear and tear on the car and fuel efficiency is reduced. Hydro units do not suffer from
those same problems, which is why the Authority entered into the agreement with SRP to take
advantage ofthat ramping capability.
Chairman McComish recalled that it is more cost effective for SRP than other sources. He asked
how more electricity can be obtained. Mr. Mulholland said that is on the agenda. There will be
a reallocation of power in 2017 among the states of California, Nevada and Arizona, and he
would like to see Arizona receive a larger share than in the past.
Senator Leff moved that the Committee of Reference recommend to the Legislature
that the Arizona Power Authority be continued for 10 years. The motion carried by
a roll call vote of 8-0-0-2 (Attachment 18).
Without objection, the meeting adjourned at 11 :38 a.m.
(Original minutes, attachments and tape are on file in the Office ofthe Chief Clerk).
SENATE COMMERCE AND ECONOMIC DEVELOPMENT
AND HOUSE OF REPRESENTATIVES COMMERCE
COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW
OF THE INDUSTRIAL COMMISSION OF ARIZONA, ETC.
13 November 9, 2005
Attachment C
COMMITTEE OF REFERENCE
Arizona House of Representatives
Committee on Commerce
Arizona State Senate
Committee on Commerce and Economic Development
PERFORMANCE AUDIT
PURSUANT TO TITLE 41, CHAPTER 27
ARIZONA REVISED STATUTES
OF THE
ARIZONA POWER AUTHORITY
DECEMBER
2005
Commission
MICHAEL C. FRANCIS
Chairman
JOHN I. HUDSON
Vice-Chairman
DALTON H. COLE
DELBERT R. LEWIS
RICHARD S. WALDEN
August 29,2005
ARIZONA POWER AUTHORITY
1810 W. Adams Street· Phoenix, AZ 85007-2697
(602) 542-4263 • FAX (602) 253-7970
Staff
JOSEPH W. MULHOLLAND
Executive Director
RITA K. GALLANT
Executive Secretary
Ms. Diana O'Dell
Arizona House of Representatives
1700W. Washington Avenue
Phoenix, Arizona 85007
RE: Sunset Review Process - Arizona Power Authority
Dear Ms. O'Dell:
In reply to Representative John McComish's letter of June 23, 2005, I enclose an original
and five copies of the Arizona Power Authority's Response to the Sunset Review inquiries
contained in Representative McComish's correspondence. A copy of the Authority's 46th
Annual Report is also enclosed.
The Authority will gladly provide any additional information that might be required by
the Joint Legislative Audit Committee or by the House and Senate Committee assigned to
this matter.
It is my understanding that a public hearing will be scheduled. We look forward to
participating in that aspect of the review process.
Very sincerely,
Joseph W. Mulholland
Executive Director
Enclosures
cc: Arizona Power Authority Commissioners
A150#550\Sunset Reply 8 05
RESPONSE TO SUNSET REVIEW INQUIRIES
ARIZONA POWER AUTHORITY
PART I
1. The objective and purpose of establishing the Authority.
The Arizona Power Authority (Authority), a body corporate and politic, was created
by the State Legislature more than fifty years ago to comply with a requirement of
Federal law that Arizona's share of Hoover hydroelectric power be allocated to the
State or an agency acting on behalf of the State in its sovereign capacity.
Hoover hydroelectric power first became available in 1936, but at that time Arizona
was unable to receive and distribute its share ofpower, while California was making
use ofArizona's allocation. In 1944, the Arizona Legislature created the Authority as
set forth in Arizona Revised Statutes, § 30-101, et seq., charging the Authority with
the responsibility of acquiring and marketing Arizona's 17.5% share ofHoover power,
acting on behalf of the State in its sovereign capacity.
As originally enacted, Chapter 1, Title 30, Arizona Revised Statutes, (the Arizona
Power Authority Act) covered the organization of the Authority and included the
following broad authorizations:
Acquisition and marketing of electric power generated from the
waters of the mainstream Colorado River and from other sources authorized by
law.
Construction, operation and maintenance ofhydroelectric facilities at various
Colorado River and other sites.
Encouragement of activities deemed feasible for the production of electric
power or energy from solar, nuclear or geothermal resources.
1
Disposition of electric power in an equitable manner so as to render the
greatest public service to encourage the widest practical use at lowest possible
cost.
Acquisition, construction and operation of electric transmission systems,
standby or auxiliary plants or facilities to generate electric power.
Negotiation ofagreements for delivery ofpower generated or produced by the
Federal Government or other projects for the benefit of customers.
Negotiation of agreements for inter-connections or pooling with projects,
plants, systems or facilities of other distributors of electric power.
Cooperation with public agencies to conserve, develop, acquire and market
power and transmission resources.
In addition to the Arizona Power Authority Act, the Legislature, in 1967, adopted the Arizona
State Water and Power Plan (A.R.S. § 45-1701 et seq.). This legislation, in large part, was
enacted to provide a financing vehicle for the Central Arizona Project through the Arizona
Power Authority, when it appeared that Federal funding would not be available. This concept
included the construction of various hydroelectric facilities, such as Hualapai Hydroelectric
Project, Marble Canyon Hydroelectric Project, Montezuma Pumped Storage Project, and
Havasu Pumped Storage Project. The Central Arizona Project was ultimately constructed by
the Federal government so a State-funded project never became a reality. Construction of the
other projects mentioned in the statutes was never realized, although the Montezuma Pumped
Storage Project was commenced but later abandoned due to changes in market conditions and
other economic factors.
In later years, the Legislature added the Hoover Modifications and the Hoover Upratings to
the Arizona State Water and Power Plan as Projects that the Authority was authorized to
finance, acquire and construct. As will be discussed later in this Response, the Authority has
successfully financed and constructed its portion of the Hoover Uprating Project at Hoover
Dam.
2. The effectiveness with which the Authority has met its objective and purpose and the
efficiency with which it is operated.
Since its creation in 1944, the Authority has carried out its legislative mandate by
serving low-cost, dependable hydroelectric power to irrigation and electrical districts,
cities, and towns located throughout the State of Arizona. The Central Arizona Water
Conservation District (CAWCD), as the operating agent for the Central Arizona
Project, is one ofthe Authority's largest customers, followed by the Salt River Project.
With the exception of one small "loan" appropriation during the early years of its
existence, the Authority has operated entirely without appropriated funds. The early
2
loan appropriation was essentially a "start-up" fund in the amount of $250,000 which
was fully repaid within a short time. The Authority's revenues are derived solely from
the sale of hydroelectric power and transmission service to more than 30 wholesale
customers.
In 1984, as a part ofthe Authority's negotiation for a renewal of its 50-year contracts
with the United States for Hoover power, the Authority obtained an additional 189
megawatts of low-cost Hoover power with the passage ofthe Hoover Power Plant Act
of 1984, bringing its total allocation to 377 megawatts at nominal operating head at
Lake Mead. Under this Act, the Authority not only negotiated a 30-year renewal of its
original 50-year contract, but it was also authorized, along with the State ofNevada
and various entities in the State of California, to construct, with non-federal funds, the
Hoover Uprating Project (essentially, the rewinding and reconstruction of the
generating units at Hoover to increase their electrical output). As noted earlier, the
Hoover Uprating Project was identified as a Project that the Authority was authorized
to undertake under the State Water and Power Plan. The Authority, utilizing the
financing capabilities granted by the State Water and Power Plan, successfully issued
its first tax exempt revenue bonds in the amount of more than $90 million dollars, the
proceeds of which were utilized to finance the Authority's share of the construction
costs of the Hoover Uprating Project. At present, an amount of approximately $57.5
milliOIi remains unpaid on the Authority's Uprating bonds.
The Authority's power contracts and the budgeting, auditing and accounting of its
finances have been meticulously administered and supervised by the Commission and
its staff for the benefit of the people ofthe State of Arizona, the customers ofthe
Authority and the holders ofthe revenue bonds for which the Authority is responsible.
The Authority's revenue bonds (which carry an "AA" rating by Standard & Poor's)
are secured by the revenues received by the Authority from the wholesale distribution
and sale ofpower and energy to its wholesale contractors pursuant to long-term Power
Sales Contracts with the Authority. By law, the Authority's bonds are revenue
obligations and are not general obligations of the State of Arizona.
The Authority is required by its enabling legislation, its Power Sales Contracts and its
Bond Resolution, to operate on a cost-of-service basis only. Pursuant to its Power
Sales Contracts, the Authority's annual budget is subject to review and comment from
its power contractors prior to adoption by the Authority's Commission.
3. The extent to which the Authority has operated within the public interest.
Over the more than 50 years of its history, the Authority has purchased and marketed
its valuable Hoover hydroelectric resource fulfilling its legislative mandate to provide
power at the lowest possible cost, consistent with sound business principles. Although
the Authority does not market electric power directly to ultimate residential
consumers, it does provide low-cost power to a large number of entities on a
3
wholesale basis which, in turn, are able to market their electric power at a lower cost
than would have been obtainable from other resources. Included among the
Authority's wholesale customers are the Salt River Project, the City ofMesa, the City
of Wickenburg, the City of Page, Electrical District No.2 (a member ofthe Arizona
Electric Power Cooperative), the Central Arizona Water Conservation District (the
operating agent for the Central Arizona Project) and numerous electrical and irrigation
districts throughout Maricopa, Pinal and Yuma counties. (For more information on its
customer base, a listing ofthe Authority's current wholesale power customers is
shown on "Attachment No.1".)
In its Declaration of Purpose and Policy the Legislature, in adopting the State Water
and Power Plan, provided, in part, that "electric power resources and the use of the
energy therefrom must be developed in order to provide effective support for and
implementation ofthe State's water program and to promote the general welfare,
health, safety and prosperity ofthe people of the State." The Authority believes that
its long and successful history of marketing Arizona's share ofFederalhydroelectric
resources and its ability to negotiate a 3D-year extension of its hydroelectric contracts
'(which now expire in 2017) provides convincing evidence that the Authority has
operated with the public interest by providing low-cost electric power to its wholesale
power customers, who, in turn, pass on these savings to their own customers.
In addition, in its power marketing activities, the Authority engages in a full range of
other services, in much the same way as other wholesale power utilities. In order to
enable its power contractors to gain efficiency from variations in demand and electric
load, the Authority engages in pooling activities and enters into capacity and energy
exchanges with other utilities. The Authority, as authorized by law, is not only
responsible for administering its contracts, but operates as a functioning electric
utility.
4. The extent to which Rules adopted by the Authority are consistent with the legislative
mandate.
In March 2003, the Authority's Commission, in response to rapid changes in the
electric power industry, adopted a complete revision ofthe Authority's Rules. In its
initial enabling legislation, the Authority was directed by the Legislature to formulate
plans and develop programs for the practical, equitable and economical utilization of
electric power placed under the Authority's supervision and control. In adopting its
revised Rules, the Authority spent many months carefully crafting provisions that
address the Legislature's mandate. While the statutory scheme for the Authority
provides substantial guidance in the acquisition and distribution of electric'power in
Arizona, the Rules adopted by the Commission have been designed to "flesh out" the
statutory schemes in the State Water and Power Plan and the Arizona Power Authority
Act, with an eye to assuring a full public process wherever necessary and enhancing
and protecting the Authority's contractual relationships with the United States and
with its power contractors in Arizona. The Rules are designed to insure that electric
4
power available to the Authority is marketed on a practical, equitable and economic
basis and meet the Authority's mandate to provide power at the lowest possible cost
consistent with sound business principles.
In keeping with the Authority's utility functions, its Rules provide a detailed public
process by which long-term power is made available to eligible entities. The Rules
also spell out the procedure by which eligible entities may apply for electric service
and, if power is available under the Arizona Power Authority Act, a detailed method is
established by which an applicant may obtain a Power Purchase Certificate (which
specifies the geographic boundaries within which power supplied by the Authority can
be utilized).
With the aid ofits customers, the Authority is authorized to maintain a system of
electric load scheduling in order to reasonably predict current and future power needs
and to identify additional sources ofelectric power or transmission service that may
become either temporarily or permanently available to the Authority for power
distribution on a state-wide basis to eligible entities.
5. The extent to which the Authority has encouraged input from the public before
adopting its Rules and the extent to which it has informed the public as to its actions
and their expected impact upon the public.
As explained above, the Authority, in 2003, adopted a total revision of its Rules.
Before adopting the revised Rules, the Authority expended more than two years in
drafting and developing the Rules in their current form. The Rules were developed in
conformity with the Arizona Administrative Procedures Act, but also included
numerous meetings with the Authority's customers, prospective customers and
members ofthe public, during which oral and written comments were solicited and
accepted, resulting in a series of drafts and redrafts that were submitted for comment,
correction and addition.
Before adoption of the Rules, the Authority, in addition to the publications required by
the Administrative Procedures Act, gave public notice on at least two separate
occasions, seeking input from the general public as well as from prospective and
existing power customers and the electric utility industry in general. In addition, at
each of its regularly scheduled monthly Commission meetings, the public is invited to
make comments on pending matters. No action is taken by the Commission without
full expectation of, and participation by, the public in open public meetings.
To the extent that any specific action of the Authority is anticipated (as for example, if
a new supply ofpower were to become available to the Authority for allocation), a full
public process with advance public notice is provided both by statute and by the
Authority's Rules.
5
When the original 50-year Hoover Contracts expired in 1987, it was necessary for the
Authority, prior to the expiration date, to design and implement a reallocation process
by which old and new customers could participate in a public process to apply for, and
receive, Hoover power. The reallocation effort took more than two years to complete
and entailed numerous public meetings with both written and oral input from the
public, from other Arizona utilities, and from current and prospective purchasers of
electric power. The reallocation effort culminated in the adoption of the Authority's
Post-1987 Final Hoover Power Marketing Plan (as set forth in the Authority's "Red
Book" dated June 17, 1985). The Red Book contains the Authority's formal findings
concerning eligibility for allocation ofHoover Power, a full discussion ofpublic
comments and a statement ofthe conditions under which the Authority's new Power
Sales Contracts were negotiated and executed.
6. The extent to which the Authority has been able to investigate and resolve complaints
that are within its jurisdiction.
Although the Authority has not been presented with any "complaints", the Authority,
under its currently-adopted Rules, when read in conjunction with the Arizona
Administrative Procedure Act, is well equipped and capable of investigating and
dealing with any complaints that might arise. The Authority believes that its "open
door" policy is very useful in discussing and disposing of customers' or public issues
before they reach the "complaint" stage.
7. The extent to which the Attorney General or any other applicable agency ofthe State
government has authority to prosecute actions under the enabling legislation.
The only "action" that might occur under its enabling legislation would be the
enforcement of the Authority's contractual commitments and responsibilities under its
contracts with the Federal Government, with its customers and its bondholders.
Therefore, any legal actions would not ordinarily result from the provisions of the
Authority's enabling legislation, but would result from its business and contractual
relationships between various entities. The office of the Attorney General would have
the authority to participate in any legal proceedings necessitated by the Authority's
power marketing and utility functions, keeping in mind that the Authority is not a
regulatory agency.
8. The extent to which the Authority has addressed deficiencies in its enabling statutes
which prevent it from fulfilling its statutory mandate.
Since its inception some 50 years ago, the Authority has rarely faced any difficulty in
complying with its statutory mandate, a tribute to the initial drafters ofthe·Authority's
enabling legislation and the drafters ofthe Arizona State Water and Power Plan. The
Authority has always enjoyed a cooperative spirit in dealing with the Legislature and
6
on the rare occasions that statutory changes were deemed necessary (as for example,
adding to the list ofProjects which the Authority is authorized to undertake under the
State Water and Power Plan), the Authority has found a willingness among the
members of the Legislature (and staff personnel) to understand and appreciate the
necessity of any requested change in the statutory scheme.
9. The extent to which changes are necessary in the laws of the agency to adequately
comply with the factors listed in this subsection.
The Authority does not believe there is a present need to revise its enabling legislation
nor the provisions of the State Water and Power Plan, but does not wish to foreclose
the possibility of statutory revisions to address the rapid changes taking place in the
electric power industry.
10. The extent to which the termination of the agency would significantly harm the public
health, safety or welfare.
A termination of the Authority would have the following significant adverse results:
(A) Termination would impact the Authority's ability to perform its obligations
under its outstanding 30-year contracts with the United States and more than
30 separate power sales contracts with cities, towns and electrical and
irrigation districts, the payments from which secure the Authority's revenue
bonds; these contracts do not expire until 2017.
(B) The Hoover Power Plant Act of 1984, enacted by Congress as a vehicle by
which to renew Hoover hydroelectric power contracts and add additional
capacity to the Hoover generating plant, specifically allocated Arizona's share
ofHoover power to the Arizona Power Authority. The Act also authorized the
Authority to undertake construction of its portion ofthe Hoover Uprating
Project. Ifthe Authority were terminated, the Federal allocation of the State's
share of Hoover power would undoubtedly be jeopardized.
(C) The Boulder Canyon Project Act of 1928 specifically allocates the
hydroelectric resource from Hoover equally between Arizona, Nevada and
California. Termination of the Authority would leave Arizona without an
entity to receive Arizona's share of Hoover power on behalf of the State.
(D) In 1996, the Legislature adopted legislation that provides that the Authority
will continue in existence until the debts and obligations ofthe Authority are
fully satisfied (See A.R.S. § 41-3006.04, a copy ofwhich is attached as
"Attachment No.2"). The Authority, in issuing its Power Resource Revenue
Bonds, gave assurances to its bondholders that the Authority would continue
its existence and enforce its covenants and contracts as long as the Authority
7
has any outstanding debts or obligations (bonds) that were issued to finance the
cost of the Hoover Power Plant Uprating Project. Any tennination ofthe
Authority would conflict with such assurances, resulting in a possible default
in the Authority's bond covenants.
(E) If the existence ofthe Authority were tenninated without naming a successor
that is authorized by law to succeed to the utility functions of the Authority, the
tennination could cause the Authority to default under its 30-year contracts
with the United States (through the Western Area Power Administration of the
Department ofEnergy) as well as cause a default under its Power Sales
Contracts with its customers which would eventually cause a default under the
Authority's bond covenants.
(F) The excellent financial ratings of the Authority's revenue bonds could be
adversely affected, because the ratings of its bonds are dependent upon
professional utility management and a staff that is capable ofcarrying out
utility operations and functions, including the management ofthe disposition
of power and energy required by the Power Sales Contracts.
11. The extent to which the level of regulation exercised by the Authority is
appropriate and whether less or more stringent levels of regulation would be
appropriate.
As indicated earlier, the Authority is not a regulatory agency except in tenns of
monitoring its contractual relationships with the United States and its customers and in
the administration of power under its jurisdiction. It is not, for example, a regulatory
agency in the sense that the Arizona Corporation Commission regulates various
activities, such as the retail rates at which public service corporations may sell electric
power to retail consumers.
The Authority does not envision or encourage any greater level of regulation.
12. The extent to which the Authority has used private contractors in theperfonnance of
its duties and how effective use of private contractors could be accomplished.
The Authority is unable to use private contractors, because the use ofprivate
contractors to perfonn the Authority's governmental functions would result in a
violation of its covenants to maintain the exclusion ofthe interest on its bond from
Federal income taxation. The Internal Revenue Code of 1986, as amended, has strict
rules with respect to any privatization of the Authority's bond~financed activities.
Furthermore, the Authority is a "preference" entity under Federal law and it must
retain its preference status in order to carry out many of its statutory functions. A
private contractor cannot qualify as a Federal preference entity.
8
INFORMATION ABOUT THE AUTHORITY'S STAFF
Presently, the Authority's staff consists of an Executive Director, who has the overall
responsibility for the administration, policies and management of the Authority, plus "hands­on"
expertise in carrying out the Authority's funding functions and operations. Additional
staffmembers are responsible for power scheduling and marketing, with oversight in the areas
of pooling and exchange arrangements between the Authority and its customers, finance and
fiscal affairs, and in cooperation with the State Treasurer, responsibility for budgeting, receipt
and expenditure of funds, both with respect to the Authority's revenue bond transactions and
with respect to the Authority's other operating and revenue requirements. Staff is also
actively involved in the search and development of other generation (including renewable
energy sources) and transmission resources, to provide economical and reliable electric power
and transmission for the State.
PART II
ADDITIONAL INFORMATION
REQUESTED BY THE COMMITTEE
1. An identification of the problem or the needs that the agency is intended to address.
The Authority is not aware of any problems that should be addressed in connection
with its operations.
As reflected in earlier responses, one of the Authority's major obligations is to provide
dependable low-cost power to its qualified wholesale power customers.
In recent months, the electric utility industry, in general, and the Authority, in
particular, has been facing increasing challenges in the areas of cost control and power
supply.
The Authority's primary resource is hydroelectric generation at Hoover Dam.
Availability of power at Hoover is dependent on water releases. The continuing
drought in the Southwest has seriously affected the Colorado River watershed, making
it necessary for the Authority to participate in contingency planning to avoid loss of
generation at Hoover. Also, escalating costs for environmental programs and national
security present substantial problems for the Authority and its customers. The
Authority works with numerous local and Federal agencies to address such issues.
9
2. A statement to the extent practicable, in quantitative and qualitative terms, of the
objectives ofthe Authority and its anticipated accomplishments.
OBJECTIVES:
a. Acquire and Market Power
Power Contracts with Western
Transmission Contracts with Western
Power Sales Contracts with Customers
Scheduling Entity Agreement with Salt River Project
Resource Exchange Arrangements with Customers
b. Construction/Operation on Colorado River
Hoover Power Plant Act of 1984
Financing and Construction ofHoover Modifications
c. Encourage Renewables
History of Involvement
National Research Labs (NREL) Contract
Develop Renewable Energy Credits
Native American Efforts
d. Develop Power and Transmission Systems
Transmission Funding Effort to Reduce Costs by Use of Revenue
Bonding Capability
Build on Bonding/Funding Experience to Assist in New Transmission
for the Southwest
10
e. Agreements for Delivery ofPower Generated by Federal Entities/Others
(See (a) above)
f. Cooperation with Public Agencies
Hoover Implementation Agreement - (Western, Bureau of
Reclamation, States of Arizona, Nevada and California)
Hoover Engineering & Oversight Committee
Colorado River Energy Distributors Association
American Public Power Association
National Electric Reliability Counsel
Electrical and Irrigation Districts' Interaction
Federal Multi-Species Conservation Program
3. An identification of any other agencies having similar conflicting or duplicate
objectives, and an explanation ofthe manner in which the agency avoids duplication
or conflict with other such agencies.
As noted earlier, the Authority was created to fulfill a'Federal requirement that the
State, or an agency acting on behalfof the State in its sovereign capacity, enter into
contracts with the United States to obtain and market Arizona's share of hydroelectric
power generation at the Boulder Canyon Project (Hoover Dam).
The Authority, as a body corporate and politic of the State ofArizona, fulfills both
Federal and State mandates that are not duplicated by any other agency of the State.
No other State agency has the same goals, objectives or obligations nor, in the
Authority's view, is any other state agency qualified or equipped to carry out the
responsibilities of the Authority.
4. An assessment of the consequences of eliminating the agency or consolidating it with
another agency.
Please see the Authority's response to Items No.1 0, Part I and No.3, Part II which, in
part, address the difficulty and consequences of eliminating the Authority and discuss
the unique role assigned to the Authority by both Federal and State law.
11
To summarize, eliminating the Authority would cause virtually unsolvable problems
with the Authority's outstanding contractual and statutory commitments to the United
States, to the Authority's power customers and to the citizens of the State of Arizona
for whose ultimate benefit the Authority receives and markets electric power
generated from the Colorado River.
The Authority does not believe that there is another agency that is either qualified or
permitted by law to carry out the Authority's electric utility functions. Assuming, for
argument, that such an agency exists, the Authority does not believe that consolidation
would achieve any useful purpose and, instead, at a minimum, would result in an
increase in costs to the Authority and its customers; at a maximum, a default on the
Authority's contracts would result.
Among the difficulties that would be encountered if the Authority were eliminated are:
a. Failure to comply with a requirement ofFederal law that Hoover contracts to
be entered into with the Authority as the State's representative in its sovereign
capacity.
b. Interruption and default in the Authority's performance of its contracts with the
United States and its wholesale power customers.
c. If contract default occurred, it would trigger a default in the Authority's
Revenue Bonds.
d. The Authority's "AA" Bond Rating reflects the rating agencies' reliance on the
Authority's multi-year history of uninterrupted service and its ability to
perform its utility functions. The rating agencies would immediately
downgrade the Authority's bonds or perhaps refuse to give a rating at all.
Any effort to consolidate the Authority with another agency could generate essentially
the same problems as eliminating the Authority.
5. Describe any major activities/projects, accomplishments or obstacles to success.
In brief, the Authority has undertaken or is currently pursuing the following projects
and activities:
Negotiated and obtained a 50% increase in Arizona's entitlement to Hoover
hydropower.
Obtained a 30-year extension ofthe Authority's Hoover power contracts.
Issued its $90 million Power Resource Revenue Bonds to pay for its share of
the uprating of the electric generators at Hoover Dam.
12
Negotiated and reallocated its Hoover power resource among eligible Arizona
users under contracts expiring in 201 7.
Successfully participated in several Federal court challenges to the Authority's
Hoover resources.
Over a period often or more years, played a major role in the development and
adoption ofthe Lower Colorado River Multi-Species Conservation Program
(LCR-MSCP), a $620 million partnership between Arizona, California and
Nevada and the Federal government for the protection ofendangered species
along the Colorado River.
Playing a key role in the ongoing efforts to develop a program ofrenewable
energy credits to assist in the development and utilization of renewable energy
resources in Arizona.
Engaging in the early and current efforts to explore the viability of wind power
as an alternative power resource for Arizona users, especially Native
Americans.
Assisting Native American Tribes with their planning and distribution of
power resources on tribal lands.
Ongoing oversight ofthe operations and expenditures of the Federal
Government with regard to the operations of Hoover Dam and the marketing
and transmission of Federal hydropower.
Participation and membership in numerous Federal and State organizations that
are concerned with the reliability and cost of providing and transmitting
electric power on the national and local grid.
Monitoring and participation in drought-related activities on the Colorado
River.
Continuing efforts to ensure that the Authority's customers have access to
reliable, cost-based power and energy to serve current and future needs.
6. Provide a copy of the Authority's most recent Annual Report, including financial data
that outlines the fee structure, expenditure and revenues and number ofFTEs.
A copy of the Authority's 46th Annual Report (2004) is included with this Response.
13
The Authority does not have a "fee structure" as such. The Authority's revenues are
derived from electric power rates charged to its wholesale power customers under
long-term power sales contracts that expire in 2017. The establishment of its power
rates is a function carried out by the Authority Commission in keeping with its
statutory and contractual commitments.
Currently, the Authority has twelve FTEs.
The Authority's staff consists ofan Executive Director, who, subject to the direction
of the Authority Commission, has the overall responsibility for the administration,
policies and management ofthe Authority, plus "hands-on" expertise in carrying out
the Authority's utility functions and operations. Additional staffmembers are
responsible for power scheduling and marketing, with oversight in the areas of pooling
and exchange arrangements between the Authority and its customers, finance and
fiscal affairs, and, in cooperation with the State Treasurer, responsibility for investing,
budgeting, receipt and expenditure of funds, both with respect to the Authority's
revenue bond transactions and with respect to the Authority's other operating and
revenue requirements.
7. The composition and manner of appointment of the Arizona Power Authority
Commission.
The purposes and policies of the Authority are carried out through the Arizona Power
Authority Commission, composed of five members appointed by the Governor with
the consent of the Senate.
The term of office for each member is six years. Members of the Commission must be
electors qualified by administrative and business experience. No member may hold
any other salaried public office or be associated with any public service corporation
engaged in generating, distributing or selling power to the public generally in this
State for profit.
No Commission member may have an interest in any business that may be adversely
affected by the operation of the Authority. Members of the Commission may be
removed by the Governor for cause.
The following is a list of the current members of the Commission with a brief
biographical statement concerning each Commissioner and the expiration date ofthe
Commission Member's term of office:
Michael C. Francis, Chairman:
Starting his tenure on the Commission in 1999, Mr. Francis was selected Chairman in
April 2003 and re-elected to this position in 2005. In addition to his invaluable work
14
on the Commission, Mr. Francis is a partner in Santa Lucia Farms, producer of over
3.7 million garden rose bushes annually. Mr. Francis also owns and operates Francis
Insurance Agency, which insures Arizona and California farmers. Mr. Francis is a
Board of Directors member ofM&I Bank, Arizona Region. He is also a member of
the American Rose Society. His current term expires in January 2008.
Lt. General John I. Hudson (Ret.), Vice-Chairman:
First appointed to the Arizona Power Authority Commission in March 2000, John 1.
Hudson was elected Vice Chairman in May 2003 with his current term expiring in
2006. A retired Lieutenant General in the U.S. Marine Corps where he served for 37
years, John Hudson is a member ofthe Board ofDirectors ofthe Yuma Regional
Medical Center. In addition, he is a member and past chairman of the Greater Yuma
Port Authority Board ofDirectors, a founding Director ofthe Foothills Bank ofYuma,
a member ofthe Foothills Rotary Club ofYuma and past president ofYuma's 78­CRIME
Board of Directors.
Richard S. Walden:
Appointed to the Commission in 1984 and re-appointed through his present term
expiring in 2010, Mr. Walden is the President and CEO of Farmers Investment
Company, a family-owned, pecan growing and processing company headquartered in
Sahuarita, Arizona. Mr. Walden is a member of the Board ofthe International Tree
Nut Council and in that capacity serves as the chairman ofthe Committee for
Nutrition and Education associated with the Nutrition and Education Foundation. Mr.
Walden is also a former member of the Advisory Council on Small Business and
Agriculture for the Federal Reserve Bank of San Francisco and a member of the Board
ofthe National Pecan Shellers Association.
Dalton H. Cole:
Appointed to the Commission in January 2002 for a term to run until 2008, Dalton
Cole is a retired businessman and farmer. A past member ofthe Central Arizona
Water Conservation District Board, Mr. Cole co-founded and chaired the HoHoKam
Irrigation District. For 18 years, he also served on the board ofElectrical District No.
2 in Pinal County and is a past chairman. In addition, Mr. Cole is a past chairman of
the State Board ofDirector for Community Colleges. He has served on the Ground
Water Management Committee for Pinal County, as well as advisory committees to
the Arizona Legislature regarding water and power issues.
15
Delbert R. Lewis:
First appointed to the Arizona Power Commission in April 2003, Delbert Lewis has
been reappointed for a six-year term ending in January 2010. As one of the founders
ofKTVK Channel 3 and the CEO ofMAC America Communications, Inc., Mr.
Lewis' past and present civic affiliations include the Arizona Broadcasters
Association, Metropolitan Phoenix Broadcasters, Phoenix Chamber of Commerce,
Samaritan Health Services, Greater Phoenix Leadership, the National Conference,
Maricopa County Sports Authority and Orpheum Theatre Foundation. Now farming
4,000 acres of farmland near Florence, Arizona. Mr. Lewis and his late wife, Dr.
Jewell Lewis, have been nationally recognized for their financial support and
commitment to education and community service.
* * * *
August 29, 2005
A150#550lRespToSunsetInquiries
16
ARIZONA POWER AUTHORITY
WHOLESALE CUSTOMERS
Aguila Irrigation District
Ak-Chin Indian Community*
Arizona Electric Power Cooperative*
Arizona Public Service Company*
Avra Valley Irrigation & Drainage District
Buckeye Water Conservation District
Central Arizona Water Conservation District
Chandler Heights Citrus Irrigation District
Citizens Utilities Com,pany
City ofMesa*
City ofPage
City of Safford
City of Thatcher
City ofWickenburg
Cortaro-Marana Irrigation District
Electrical District No.2, Pinal
Electrical District No.3, Pinal
Electrical District No.4, Pinal
Electrical District No.5, Maricopa
Electrical District No.5, Pinal
Electrical District No.6, Pinal
Electrical District No.7, Maricopa
Electrical District No.8, Maricopa
Harquahala Valley Power District
McMullen Valley Water Conservation & Drainage District
Ocotillo Water Conservation District
Tohono O'Odham Utility Authority*
Queen Creek Irrigation District
Roosevelt Irrigation District
Roosevelt Water Conservation District
Salt River Project
San Carlos Project*
Silverbell Irrigation & Drainage District
Tonopah Irrigation District
Tucson Electric Power Company*
Wellton-Mohawk Irrigation & Drainage District
*Have contract but not presently receiving allocation.
Attachment No.1
A150#550lRespToSunsetinquiries
17
§ 41-3006.04. Arizona power authority; conditional termination July 1, 2006
A. The Arizona power authority terminates on July I, 2006, and title 30, chapter 1, article
1 is repealed on January 1,2007, if the authority:
1. Has no outstanding contractual obligations with the United States or any United States
agency.
2. Has no outstanding debts or obligations that were issued to finance the cost of the
Hoover power plant modifications project or the Hoover power plan uprating project.
3. Has otherwise provided for paying or retiring these debts or obligations.
B. If any contractual debt or obligation listed in subsection A exists and no satisfactory
provision has been made to payor retire the debt or obligation, the authority, and title 30,
chapter 1, article 1, shall continue in existence until the debt or obligation is fully satisfied.
Added by Laws 1996, Ch. 10, § 2, eff. July 20, 1996, retroactively effective to July 1, 1996.
Attachment No.2
A150#550lRespToSunsetinquiries
18
QQ, ..
LETTER TO THE GOVERNOR 2
REPORT OF THE EXECUTIVE DIRECTOR 3
REPORT OF THE COMMISSION .4
OPERATIONS AND THE ENVIRONMENT 5
SCHEDULE OF CAPACITY AND ENERGY SALES 6
REPORT OF INDEPENDENT ACCOUNTANTS .7
MANAGEMENT'S DISCUSSION AND ANALYSIS 8
[REQUIRED SUPPLEMENTARY INFORMATIONl
FINANCIAL STATEMENTS -.. 14
STATEMENT OF NET ASSETS 14
STATEMENT OF REVENUES, EXPENSES
AND CHANGES IN NET ASSETS 15
STATEMENT OF CASH FLOW 16
NOTES TO FINANCIAL STATEMENTS 18
DEBT SERVICE COVERAGE RATIO 26
I
~~~~~~~~~~~~~~=~zcb
LETTER TO THE GOVERNOR ~I
December 1, 2004
The Honorable Janet A. Napolitano
Governor of Alizona
State Capitol
Ninth Floor, West Wing
Phoenix,.f\.Z 85007
Dear Governor Napolitano:
This 46th Annual Report of the Arizona Power Authority details the AuthOlity's operation and
financial activities for the fiscal year ending June 30, 2004. This report highlights the Autholity's
efforts in administering Arizona's hydroelectric power entitlement generated at Hoover Dam
located on the Colorado River. Although the Colorado River system is entering into the sixth
year of a severe drought, the system, including Lake Mead and other reservoirs, still retains
approximately fifty percent of its maximum water reserve in storage. Therefore, the state's
water and power entitlements, although at reduced levels of electric generation, will continue
to be available for the foreseeable future.
In addition, the Authority is actively engaged in studying supplemental electric power generation
resources that might be cost effective in supplementing our valuable hydro resource. The development
of renewable, electric power resources within the state will further the long-term goal of reducing
Arizona's dependency on external energy resources.
Sincerely,
~L
Michael C. Francis
Chairman
JOE MULHOllAND
9
The prolonged drought along the Colorado River Basin
remains a selious challenge for the Authority and its customers.
Some observers speculate that the extended drought marks
a new period of drier weather for the southwest. Others
contend that, given the dry years, a wet winter is inevitable.
The fact is, we do not know what the weather brings.
However, we do know, that improving performance is the
best preparation for the challenges the future may bring;
and, to that end, the Authority has embarked on a series
of programs to improve its overall performance.
First, the Authority has achieved significant budget discipline
as a result of revised expenditure reviews and streamlined
budget analyses implemented in recent years. In early
2005, the AuthOlity will refund approXimately $1 million
to its customers, which represents about a 7% reduction in
their power payments to the Authority. Monthly rate
reviews will continue to verify that the rates are in line with
our costs, ensuring stability and the lowest rates possible
without jeopardizing operations or debt service obligations.
To further control expenditures and mitigate any price jumps
that could result from drought limited power production, the
Authority is exploring additional cost-saving measures. These
include the possibility of purchaSing long-term transmission
rights on the Western Area Power Administration's
transmission system through the prepayment of high
interest debt which, in tum, could lower charaes to our b
customers by approximately $400,000 annually.
The Authority has analyzed the flows on the Colorado River
to develop a better understanding of what we might expect
for the future. In addition, we are studying the feaSibility of
installing low water level turbines at Hoover to improve
efficient operation during low water conditions.
As always, security at Hoover Dam remains a top priority.
Construction of a new bridge between Arizona and Nevada
is expected to be completed in 2008. This new bridge will
reroute non-essential traffic away from Hoover Dam, thus
improving overall seclirity.
The Authority is also participating in a Multi-Species
Conservation Program to improve the environment and habitat
for endangered and threatened species along the Lower
Colorado River Basin. This pro-active 50-year program will
rejuvenate many of the endangered and threatened species
that dwell in the Lower Colorado River Basin and will also
provide additional safeguards to ensure that generation at
Hoover Dam is not threatened by environmental problems.
In addition, the Authority is looking allead in the area of
renewable energy, having recently received a grant from the
National Renewable Energy Laboratory to study integrating
wind and hydropower generation. The study will lead to a
multi-year feasibility contract to help introduce new reliable
energy sources into Arizona.
Through these and other initiatives, we remain optimistic
about the AuthOrity's ability to meet its mandate to provide
low cost power wIllie assisting in the development and
improving power availability to our customers and the citizens
throughout the state of Arizona. I .-l
it
REPORT OF THE COMMISSION ~I
The Arizona Power Authority was established in 1944 to administer Arizona's entitlement to hydroelectric power generated at
Hoover Dam and Powerplant located on the Colorado River. Additionally, the Autll0rity is autllorized to develop low-cost,
electrical power generation and transmission facilities within the state for Arizona's citizens. The Authority recently passed its
40th anniversary of faithfully providing low-cost hydroelectric power to tlle consumers of the state. Due to the continued severe
drought impacting the Colorado River Basin, the AutllOrity is aggressively investigating and researching new and sustainable
renewable energy resources that could help reduce Arizona's dependency on external power resources.
MICHAEL C. FRANCIS - Chairman
Starting his tenure on the commission in 1999, Mr. Francis was selected Chainnan in April 2003. In addition to his
invaluable work on the commission, Mr. Francis is a partner in Santa Lucia Farms, producer of over 3.7 million
garden rose bushes annually. Mr. Francis also owns and operates Frances Insurance Agency, which insures Arizona
and California fanners. Mr. Francis is a Board of Directors member for M&I Thunderbird Bank, Arizona Region.
He is also a member of the Anierican Rose Society. His cun-ent term e},.-pires in January 2008.
LT GEN JOHN I. HUDSON - Vice Chairman
First appointed to the Arizona Power Authority Commission in March 2000, John 1. Hudson was elected to the
Vice Chair in May 2003 with his cunent tenn expiring in 2006. A retired Lieutenant General in the U.S. Marine
Corps where he served for 37 years, John Hudson is a member of the Board of Directors of the Yuma Regional
Medical Center. In addition, he is a member and past chainnan of the Greater Yuma Port Authority Board of
Directors, a founding Director of the Foothills Bank of Yuma, a member of the Foothills Rotary Club of Yuma
and past president of Yuma's 78-CRIME Board of Directors.
RICHARD S. WALDEN
Appointed to the Commission in 1984 and re-appointed through his present term expiring in 2010, Mr. Walden is the
President and CEO of Fanners Inveshnent Co., a family-owned, pecan growing and processing company headquartered
in Sahullrita, Arizona. Mr. Walden is a member of the board of the International Tree Nut Council and in that capacity
serves as the chainnan of the Committee for Nutrition and Education assoeiated with the Nutrition and Education
Foundation. Mr. Walden is also a member of the Advisory Council on Small Busirtess and Agriculture for the
Federal Reselve Bank of San Francisco and a member of the Board of the National Pecan Shellers Association.
DALTON H. COLE
Appointed to the Commission in January 2002 for a tenn to run until 2008, Dalton Cole is a retired businessman
and fanner. A past member of the Central Arizona Water Conservation District Board, Mr. Cole co-founded and
chaired the HoHoKam Imgation District. For 18 years he also served on the board of Electrical District No.2 in
Pinal County and is a past chainnan. In addition, Mr. Cole is a past chainnan of the State Board of Directors for
Community Colleges. He has served on the Ground Water Management Committee for Pinal County, as well as
advisory committees to the Arizona Legislature regarding water and power issues.
DELBERT R. LEWIS
First appointed to the Arizona Power Commission in April 2003, Delbert Lewis has been reappointed for a
sb:-year tenn ending in January 2010. As one of the founders ofKTVK Channel 3 and the CEO of MAC America
Communications, Inc, Mr. Lewis' past and present civic affiliations include the Arizona Broadcasters Association,
Metropolitan Phoenix Broadcasters, Phoenix Chamber of Commerce, Samaritan Health Services, Greater Phoenix
Leadership, the National Conference, Maricopa County Sports Authority and Orpheum Theatre Foundation.
Now farming 4,000 acres of fannland near Florence, Arizona. Mr. Lewis and his late wife, Dr. Jewell Lewis, have
been nationally recogrrized for their fInancial support and commitment to education and community service.
1~..oPERATIONS & THE Et'-JVIRONMENT
COLORADO RIVER OPERATIONS
Water year 2004 marked the fifth consecutive year with below average inflow
into Colorado River reservoirs, including Lake Mead. Unregulated inflow to Lake
Powell, upriver of Lake Mead, was 62, 59, 25, 51, and 51 percent for water years
2000 through 2004 respectively. Reservoir storage at Lakes Powell and Mead
declined for the fifth straight year. During the year, Lake Mead reservoir storage
decreased by 1.681 million acre-feet (maf) and Powell decreased by 2.941 maf.
At the beginning of the 2004 water year, the Colorado River system's total storage
was 57 percent of capacity. As of September 30, 2004, total system storage was down
7 more percent to 50 percent of capacity, a decrease of approximately 4.238 maf.
Under the most probable inflow scenario, the downstream delivery requirements
are expected to control water releases from Hoover Dam. Therefore, the normal
condition is the clitelion governing the operation of Lake Mead for calendar
year 2005 pursuant to the Colorado River Annual Operating Plan and Supreme
Court Decree. Reclamation does not anticipate any available unused state water
apportionment for calendar year 2005.
'H- **
THE ENVIRONMENT
The voluntary Lower Colorado River
Multi-Species Conservation Program has
continued in development throughout the
past year. Most notably accomplished, the
Memorandum of Agreement was executed
among the Secretary of the Interior and
the states of Arizona, California and Nevada
on September 14, 2004. This is a 50-year
agreement whereby the federal and
non-federal participants each share fifty
percent of the total $626 million program
cost. Various implementation documents
and agreements are now being negotiated
among the parties, which will place the
Memorandum of Agreement into effect.
The follOwing graph illustrates
the AuthOrity's histOlical
energy sales (GWh) since
1996 for power obtained
from the Hoover Powerplant
and for supplemental sales.
Supplemental power is
obtained by the Authority for
sale to customers on an "as
requested" basis. This energy
augments the customers'
allocation from the AuthOrity.
._ilOOm ENERGY SALES _iSUPPLEMENTAL ENERGY SALES
~
~--{.
1996 1997 1998 1999 2000 2001 2002 2003 2004
FISCAL YEAR 1996 1997 1998 1999 2000 2001 2002 2003 2004
HOOVER 792 1,485 1,389 1,318 1,205 1,103 1,098 899 753
SUPPLEMENTAL 224 ~ 3 2 4 0 0 0 0
TOTAL 1,016 1,564 1,392 1,320 1,209 1,103 1,098 899 753
i~
E.
r
SCHEDULE OF CAPACITY AND ENERGY SALES ~I
AVERAGE ENERGY MillS PRIOR
BILLING DEMAND DELIVERED SALES PER YEAR
SALE OF HYDRO POWER (KW) (KWH) ($) KWH ADJ. ($)
Customers
Aguila Irrigation District 4,740 9,430,000 181,636 19.26 ($6,460.68)
AVTa Valley Irrigation & Drainage District 475 2,495,000 35,298 14.15 ($890.73)
Buckeye Water Conseration District 2,245 7,243,000 122,391 16.90 ($3,325.41)
Central Arizona Water Conservation District 121,758 175,918,000 3,796,409 21.58 ($159,554.62)
Chandler Heights Citrus Irrigation District 701 2,681,000 33,580 12.53 ($1,244.30)
Cortaro-Marana Irrigation District 4,852 22,007,000 273,761 12.44 ($7,841.61)
Electrical District No.1, Pinal 0 0 0 0.00 $0.00
Electrical District No.2, Pinal 14,656 54,281,000 854,213 15.74 ($24,115.82)
Electrical District No.3, Pinal 11,980 70,735,000 1,055,343 14.92 ($19,687.18)
Electrical District No.4, Pinal 14,655 51,809,000 745,062 14.38 ($25,528.03)
Electrical District No.5, Pinal 11,129 37,443,000 534,532 14.28 ($18,823.38)
Electrical District No.5, Maricopa 265 1,421,000 17,879 12.58 ($473.82)
Electrical District No.6, Pinal 6,035 18,264,000 242,632 13.28 ($9,993.32)
Electrical District No.7, Maricopa 7,910 12,350,000 253,418 20.52 ($10,710.32)
Electlical District No.8, Maricopa 18,234 57,236,000 972,224 16.99 ($26,295.76)
Harquallala Valley Power District 1,876 9,262,000 142,538 15.39 ($2,829.13)
Maricopa County Municipal Water District #1 6,661 14,444,000 272,793 18.89 ($9,316.85)
McMullen Valley Water 6,850 15,297,000 284,204 18.58 ($9,436.30)
Conservation & Drainage District
Ocotillo Water Conservation District 1,801 6,962,000 88,363 12.69 ($2,930.23)
Queen Creek Irrigation District 1,334 2,121,000 27,138 12.79 ($2,035.17)
Roosevelt Irrigation District 2,426 12,579,000 190,512 15.15 ($3,986.75)
Roosevelt Water Conservation District 5,094 18,361,000 257,522 14.03 ($8,779.92)
Salt River Project 29,225 119,046,000 1,727,480 14.51 ($47,430.34)
San Tan Irrigation District 393 1,641,000 20,724 12.63 ($797.03)
Silverbell Irrigation & Drainage District 536 4,455,000 54,058 12.13 ($1,129.46)
Tonopall Irrigation District 1,168 4,668,000 75,324 16.14 ($1,770.70)
Wellton-Mohawk Irrigation & Drainage District 2,192 8,824,000 129,992 14.73 ($3,5.59.02)
City of Page 784 983,000 23,399 23.80 ($1,031.91)
City of Safford 1,568 3,598,000 62,057 17.25 ($2,371.92)
Town of Thatcher 792 2,476,000 36,887 14.90 ($1,287.19)
Town of Wickenburg 1,725 4,916,000 82,757 16.83 ($2,982.24)
Ak-Chin Indian Community 0 0 0 0.00 0
Arizona Electric Power Cooperative 0 0 0 0.00 0
Arizona Public Service Company 0 0 0 0.00 0
Citizens Utilities Company 0 0 0 0.00 0
City of Mesa 0 0 0 0.00 0
Tohono O'odham Utilities Authority 0 0 0 0.00 0
San Carlos Project 0 0 0 0.00 0
Tucson Electric Power Company 0 0 0 0.00 0
TOTAL HYDRO POWER SALES 284,056 752,946,000 $12,594,126 16.73
TOTAL NET PRIOR YEAR ADJUSTMENT $(416,619)
TOTAL SUPPLEMENTAL POWER SALES 781,443 22,626,000 $4,835,337
OTHER ELECTRIC SERVICES INCOME.... $8,433,127
TOTAL POWER INCOME $25,445,970"
-Difference between Total Eleclric Sales and Operating Revem~e ~ due to p05t~closingreconciliation of estimate to actuals between the Authority and Western Area Power Administration.
··Includes Administrative fees, -facilities charges, late charges, and Scheduling Entity revenue.
I~~EPORT OF THE INDEPENDENT ACCOUNTANTS
To the Arizona Power AuthOlity Commission
In our opinion, the accompanying statements of net assets and the related statements of revenues,
expenses, and changes in net assets, and statements of cash flows present fairly, in all material respects,
the financial position of the Arizona Power Authority (the "AuthOlity") (A Body, Corporate and
Politic, of the State of Arizona) at June 30, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of the Authority's
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying management's discussion and analysis is not a required part of the financial
statements but is supplementary information required by the Governmental Accounting Standards
Board. We have applied certain limited procedures, which consisted principally of inquiries of
management regarding the methods of measurement and presentation of the supplementary
infonnatiqn. However, we did not audit the information and express no opinion on it.
~&:~..... t£,...J... ••• ....~.--.- L L~
November 8, 2004
I
=k
MANAGEMENT'S DISCUSSION AND ANALYSIS ~I
The following is a discussion and analysis of the Arizona Power Authority's (Authority) financial perfonnance for the fiscal
year ended June 30, 2004. This discussion is designed to: (a) assist the reader in focusing on significant financial issues,
(b) provide an overview of the Authority's financial activity and (c) identify changes in the Authority's financial position.
The Management's Discussion and Analysis (MD&A) focuses on the current year's activities, resulting changes and known
facts, and should be read in conjunction with the Authority's financial statements beginning on page fourteen.
HIGHLIGHTS
AUTHORITY HIGHLIGHTS
Scheduling Entity Agreement - The Authority and Salt River Project were parties to a Scheduling Entity Agreement,
which expired on September 30,2004. A new Scheduling Entity Agreement provides for Salt River Project (SRP) to pay
the Authority $5.4 million each year in return for allowing Salt River Project to be the Scheduling Entity of the Hoover
generation in Arizona. This Agreement became effective as of October 1, 2004 and expires on September 30, 201l.
The effect of this agreement is that the energy banking program with SRP has been increased, to the advantage of our
customers. However, because payment from SRP has been reduced by $3 million each year, the rates for Hoover power
increased accordingly.
Transmission Agreement - On January 24,2003, the Authority and the Western Area Power Administration (Western)
entered into an agreement for the Advancement of Funds for Transmission Services. The Authority had an existing agreement
with Western that provided for the delivery of power and energy. The agreement provides for the Authority to advance funds
to Western on a monthly basis to fund operations, maintenance and replacement costs associated with Western's transmission
services. For the year ended June 30, 2004, the Authority advanced a net prepaid deposit of $182,360, which is included in
the Statements of Net Assets. This has demonstrated our cooperation and has given our customers greater flexibility in
working with Western.
Arizona State Treasurer-held investment write-off - The Authority is statutorily required to invest funds through the
Arizona State Treasurer (Treasurer), who has sole investment decision-making authority. In November 2002, the Authority
was advised that one of the Treasurer's chosen investments managed by National Century Financial Enterprises was under
investigation for fraud. In December 2002, the Authority was informed that the Treasurer was vitiating the investment in
question, thereby reducing the value to zero. Since that time, litigation was initiated and continues. There is no guarantee
that the litigation will result in the recovery of the Authority's funds, which total $227,224. Therefore, the Authority has
written off the lost investment amount as of June 30, 2003.
Effects of Drought on Hoover Energy - The Colorado River Basin has been experiencing severe drought conditions
for the past five years. This has resulted in a reduction in Lake Mead's storage and the power production at Hoover Dam.
Several Authority customers requested that the Authority purchase supplemental power to offset the reduced energy
production at Hooyer. The supplemental power costs are Significantly higher, and are passed directly to the requesting
customers. These supplemental revenues and costs are reflected on the Authority's books, resulting in higher revenue and
purchased power costs.
1~.0ANAGEMENT'S DISCUSSION AND ANALYSIS
Contributions - During Fiscal Year 2004, the Authority contributed $20,000 via the Arizona Power
Authority Scholarship Program to each of the follOwing schools: the Arizona State University, the University of Arizona,
and Northern Arizona University.
APA Fund - The APA Fund was established by the Arizona Power Authority Commission in 1971 and has grown
Significantly over the years. The APA Fund's Operating Revenues exceeded 2004 Budget by $1,441,450 (or 30%) due to
increased supple mental power sales. Correspondingly, the Fund's Operating Expenses exceeded the budgeted amount by
$1,352,051 (or 27%) due to increased supplemental power purchases.
Other Changes That Will Improve or Provide Future Benefit to the Arizona Power Authority - No other
agreements or new customers were added nor were there any other significant impacting events during the reporting period.
FINANCIAL HIGHLIGHTS
. The Authority's net assets increased by $598,398, or 20 percent, partly due to reduced amount of long-tenn debt
payable associated with the defeasance of the 1993 Bonds in October 2003.
. The Authority's Revenue increased by $432,317, primarily due to an increase in the sale of supplemental power.
The purchase and concomitant sale of additional supplemental power resulted from additional customer energy
requirements brought on by reduced Hoover power generation caused by the sustained drought currently being
experienced throughout the Colorado River Basin. See Authority Highlights, above.
USING THIS ANNUAL REPORT
This annual report consists of a series of financial statements. The Statements of Net Assets, the Statements of Revenues,
Expenses and Changes in Net Assets and the Statements of Cash Flows (on pages 14 - 17, respectively) provide information
about the activities of the Authority as a whole and present a longer-tenn view of the Authority's finances. The Authority is a
body, corporate and politic, of the State of Arizona and is a special-purpose government entity engaged only in business-type
activities. Accordingly, the financial statements presented in this Annual Report are the required basic financial statements in
accordance with the provisions of Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements ­and
Management's Discussion and Analysis -for State and Local Governments.
There are six basic or normal transactions that will affect the comparability of the Statements of Net
Assets summary presentation:
Net Results of Activities - which impact (increase/decrease) current assets and unrestricted net assets.
Borrowing for Capital - which increases assets and long-term debt.
Spending Borrowed Proceeds on New Capital- which reduces current assets and increases capital assets.
There is a second impact, an increase in invested capital assets and an increase in related net debt, which however,
does not change the investment in capital assets, net of debt.
Spending of Non-borrowed Current Assets on New Capital- which (a) reduces current assets and increases
capital assets and (b) reduces unrestricted net assets and increases investment in capital assets, net of debt.
Principal Payment on Debt - which reduces current assets and reduces long-tenn debt. .
Reduction of Capital Assets through Depreciation - which reduces capital assets and investment in capital
assets, net of debt.
M
MANAGEMENT'S DISCUSSION AND ANALYSIS ~I
OVERVIEW OF THE FINANCIAL STATEMENTS
This Discussion and Analysis is an introduction to the basic financial statements of the Authority,
which are comprised of two components.
(1) Fund Financial Statements
(2) Notes to the Financial Statements.
The Fund Financial Statements begin on page14 and provide detailed information about the individual funds. A fund is a
fiscal and accounting entity with a self-balancing set of accounts that the Authority uses to keep track of specific sources of
revenues and disbursements for specific purposes. The Authority's funds are treated as proprietary and are independent of
each other. Most of the Authority's financial dealings are with contracts outside of state government. A separate fund is not
maintained for government activities. The Authority does not act as a fidUCiary.
CONDENSED STATEMENTS OF NET ASSETS
June 30, 2004 June 30, 2003 DiH $ DiH%
Current assets $ 13,045,876 $ 14,952,938 $ (1,907,062) (13%)
Long-term assets 54,296,784 56,666,028 (2,369,244) (4%)
Capital assets 159,403 160,664 (1,261) (1%)
67,502,063 71,779,630 (4,277,567) (6%)
Current liabilities 5,421,283 4,854,228 567,055 12%
Long-term (bonds payable, net) 58,551,481 63,994,501 (5,443,020) (9%)
63,972,764 68,848,729 (4,875,965) (7%)
Net assets
Invested in capital assets 159,403 160,664 (1,261) (1%)
Unrestricted 3,369,896 2,770,237 599,659 22%
Net assets, end ofye~ $ 3,529,299 $ 2,930,901 $ 598,398 20%
CONDENSED STATEMENT OF NET ASSETS DISCUSSION
Current Assets decreased because the Cash with Trustee was used to reduce long-term debt.
Long Term Assets decreased because of the reduction in the cost of the ?urrent year Uprating Program, associated with
debt and other costs related to improvements at Hoover Dam.
Current Liabilities increased primarily due to the increased bonds payable for prinCipal and increased power contracts payable.
Long Term Liabilities decreased due to a change in the investments held by the Trustee, attributable to the Crossover
Refunding of the 1993 Bonds, and the paydown of bond principal.
Net Assets are explained on page 12.
These are the basic or normal transactions that will affect the comparability of the Statements of Changes in the Net Assets
summary presentation.
I I .
III MANAGEMENT'S DISCUSSION AND ANALYSIS
REVENUES
Economic Drought Condition - The sustained drought condition in the Colorado River Basin has resulted
in a decline in power production from Hoover Dam, and this has caused an increase in supplemental power consumption,
and revenues from power sold.
IncreasefDecrease in Commission Approved Power Rates - State statute requires the rates be set at levels to recover
the cost of supplying service. In addition, contracts between the Authority and its customers provide specific details
regarding rate detennination. In addition, by State statute, the Arizona Power Authority's Commission is solely
responsible for periodically modifying rates, as appropriate.
Market Impacts on Investment Income - Market conditions cause investment income to fluctuate in both the long-term
and shorter-tenn venues.
EXPENSES
Introduction of New Programs - Individual programs may be added or deleted to meet changing Authority needs;
however, none has been added during this fiscal year.
IncreasefDecrease in Authorized Personnel - Changes in the Authority's services may result in increasing/decreasing
authorized staffing. Staffing costs (salary and related benefits) represent 3.53 percent of the AuthOrity's operating costs,
and are stable.
Salary Increases (cost of living, merit and market adjustment) - The ability to attract and retain competent personnel
requires the Authority to provide a competitive salary structure, which are reviewed annually.
- MANAGEMENT'S DISCUSSION AND ANALYSIS ~I
The following condensed financial infomlation was derived from the Statements of Revenues, Expenses and Changes in
Net Assets and reflects how the Authority's net assets changed during the fiscal year.
STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS· BUSINESS TYPE ACTIVITIES
June 30, 2004 June 30, 2003 DiffS Diff%
Operating revenues $ 25,445,767 $ 25,013,450 $ 432,317 2%
Operating expenses
Purchased Power 18,014,692 18,048,125 (33,433) (0.2%)
Westem Credits (5,224,715) (5,325,522) 100,807 (2%)
Amortization of Hoover Uprating
Program Costs 5,224,715 5,325,522 (100,807) (2%)
Transmission and Distribution 5,247,155 5,229,802 17,353 0.3%
Administrative and general 1,564,083 1,427,504 136,579 10%
Depreciation 3.5,870 30,711 5,159 17%
Other 102,322 155,357 (53,035) (34%)
Total operating expenses 24,964,122 24,891,499 72,623 .30%
Operating income (loss) 481,645 121,951 359,694 295%
Other (deductions) income
Interest expense (3,209,937) (3,593,036) 383,099 11%
Deferred interest expense 2,735,366 2,958,718 (223,352) (8%)
Amortization 47,177 (82,842) 130,019 157%
Interest income 541,265 627,332 (86,067) (14%)
Other, net 2,882 (225,382) 228,264 101%
Total other (deductions)
income 116,753 (315,210) 431,963 137%
Change in net assets 598,398 (193,259) 791,657 410%
Net Assets, Beginning of Year 2,930,901 3,124,160 (193,259) (6%)
Net Assets, End of Year $ 3,529,299 $ 2,930,901 $ .598,398 20%
CHANGES IN NET ASSETS DISCUSSION
Net Assets increased overall because of the following:
· Operating Revenues and Total Operating Expenses increased because of increased supplemental
power sales. Both of these items are discussed elsewhere in this report.
· Uprating credits decreased because of decreases in debt payments and other costs related to the Uprating Program.
· Amortization of the Uprating Program decreased because of the decrease in interest payments, due to the Crossover
Refunding of the 1993 bonds.
· Administrative and General expenses increased due to increases in personnel costs, occupancy expenses, and
CREDA expenses.
· Depreciation increased because additional capital assets were acquired.
· "Other" Expenses decreased due to the fact that the LGIP loss was recorded as of 6/30/03. This is discussed elsewhere
in the Authority HigWights under the "Arizona State Treasurer - held investment write-off' section..
I~ MANAGEMENT'S DISCUSSION AND ANALYSIS
CAPITAL ASSETS
As of fiscal year end, the Authority had $159,403 invested in
a variety of capital assets, as reflected in the following
schedule, which represents a net decrease (additions less
retirements and depreciation) of $1,261 or one (1) percent
from the end of last year.
June 30, 2003
Distribution Plant
General Plant - Office
June 30, 2004
$ 24,203 $
135,200
$ 159,403 $
32,273
128,391
160,664
The following reconciliation summarizes the change in
Capital Assets, which is presented in detail on page 22
of the Notes to the Financial Statements:
June 30, 2004
Beginning Balance $ 160,664
Additions 34,609
Depreciation (35,870)
Ending Balance $ 159,403
DEBT OUTSTANDING
As of fiscal year-end, the Authority had $60,065,000 in debt outstanding, compared to $67,495,000 last year, as a result of the
defeasance of the 1993 Bonds, including a principal payment of $2,320,000, which was paid on October 1, 2003. Also see
page 23 of the Notes to the Financial Statements for a detailed summary of debt activity during the year.
BUSINESS TYPE ACTIVITIES
The following chart depicts the sources of revenues for the fiscal year.
1- Hoover Power Sales· $20,577,506 (79.17%)
2- Supplemental Power Sales/Administrative Charges· $4,868,261 (18.73%)
3- Interest Income - $541,265 (2.08%)
4- Other Income - $2,882 (0.01 %)
The Authority's revenues from sale of Hoover power may decrease in the coming
year(s) due to drought conditions. Insufficient rain and snow pack results in less water
through the turbines at Hoover Dam, thereby producing less hydroelectric power
available for sale. Additional wet years, and other factors, could help stabilize revenues.
The following chart depicts the types of expenses for the fiscal year.
1- Hoover Purchased Power - $13,179,355 (51.81%)
2- Transmission & Distribution - $5,247,155 (20.63%)
3- Supplemental Power Purchased - $4,835,337 (19.01 %)
4- Administrative & General - $1,564,083 (6.15%)
5- Net Interest Expense - $474,571 (1.87%)
6- Other Costs - $102,322 (0.40%)
7- Depreciation - $35,870 (0.14%)
For further infonnation and/or questions on
this report, please call the Power Authority
Office at 602-542-4263.
g
FINANCiAl STATEMENTS ~I
STATEMENTS OF NET ASSETS
June 30th, 2004 and 2003
APA General Fund Hoover Uprating Fund Total
2004 2003 2004 2003 2004 2003
Assets
Current assets
Cash and cash equivalents $ 3,757,939 $ 3,894,085 $ 2,148,362 $ 2,098,840 $ 5,906,301 $ 5,992,925
Cash with Trustee 2,694,576 2,694,576
Investments held by Trustee 2,653,463 2,592,771 2,653,463 2,592,771
Accounts receivable, customers
power purchases 703,846 235,854 2,136,496 1,950,056 2,840,342 2,185,910
Interest receivable 7,818 10,802 117,562 130,383 125,380 141,185
Prepaid purchased power 1,520,390 1,345,571 1,520,390 1,345,571
Total current assets 4,469,603 4,140,741 8,576,273 10,812,197 13,045,876 14,952,938
Capital assets, net 159,403 160,664 159,403 160,664
Investments held by Trustee 6,546,550 7,146,663 6,546,550 7,146,663
Advances for Hoover Uprating
Program, net 47,567,874 49,337,005 47,567,874 49,337,005
Prepaid transmission 182,360 182,360 182,360 182,360
Total assets $ 4,811,366 $ 4,483,765 $ 62,690,697 $ 67,295,865 $ 67,502,063 $ 71,779,630
Liabilities
Current liabilities
Accounts payable and other $ 12,607 $ 3,830 $ 99,682 $ 107,768 $ 112,289 $ 111,598
Power contracts payable 693,222 232,500 1,298,732 1,296,311 1,991,954 1,528,811
Accrued interest payable 772,040 893,819 772,040 893,819
Bonds payable 2,545,000 2,320,000 2,545,000 2,320,000
Total current liabilities 705,829 236,330 4,715,454 4,617,898 5,421,283 4,854,228
Bonds payable 57,520,000 65,175,000 57,520,000 65,175,000
Premium (discounts) on bonds payable 3,243,535 (1,180,499) 3,243,535 (1,180,499)
Deferred amounts, net (2,212,054) (2,212,054)
Bonds payable, net 58,551,481 63,994,501 58,551,481 63,994,501
Total liabilities $ 705,829 $ 236,330 $ 63,266,935 $ 68,612,399 $ 63,972,764 $ 68,848,729
Net Assets
Net assets
Invested in capital assets $ 159,403 $ 160,664 $ $ $ 159,403 $ 160,664
Unrestricted 3,946,134 4,086,771 (576,238) (1,316,534) 3,36